Wednesday, October 2, 2013

The Potential Pain of the Debt Ceiling Impasse

There is a great deal of concern about the ongoing debt ceiling negotiations in Washington with much talk in the mainstream media about hitting the $16.699 trillion ceiling some time in mid-October.  What is getting little coverage right now is the fact that the debt limit was actually hit - back in March 2013, just after the House passed H.R. 325, a measure that was taken to suspend the debt limit.

Let's open by looking at a chart showing the recent history of the debt limit and a breakdown of the debt into its intragovernmental and publicly held components and the percent of GDP that each represents:

Notice the figures at the bottom of the chart showing that the accumulation of nominal debt has accelerated as the years have passed.

For those of you that can relate to graphs better than charts, here is a graph showing the components of the federal debt as a percentage of GDP from 1940 to the present:

Even including the massive spending on the war effort during the early part of the 1940s, it looks like we're set to enter new debt level territory.

You may have forgotten, but the much ballyhooed $16.394 trillion debt limit was reached way back on December 31, 2012.  At that time, the Treasury Secretary was forced to use extraordinary measures to meet federal payments for a two month period.  These extraordinary measures were set to be exhausted more quickly than in previous debt ceiling emergencies and would only allow funding of government activities for between 6 and 9 weeks.  Congress took action and H.R. 325 (the "No Budget, No Pay Act of 2013) was signed into law on February 4th, 2013; this law delayed Members' salaries in the event that the House had not agreed to a budget resolution by April 15th, 2013.  H.R.325 allowed the Treasury to pay its bills that came due before May 18th, 2013 and a new debt limit would be set the following day.  As of May 19th, 2013, the debt limit was set at $16.699 trillion, $305 billion above the limit reached on December 31, 2012.  Unfortunately, as you will see, the debt passed that number long before it was even implemented!  During that time between the breaching in December and the signing of H.R. 325, the U.S. Treasury was forced to use extraordinary measures to ensure that government funding needs were met.  Once H.R. 325 was signed into law, the U.S. Treasury replenished approximately $31 billion in funds that had been used by the extraordinary measures undertaken after the $13.394 trillion debt limit was breached on December 31, 2012.  

For those of us that watch the Treasury Department's Debt-to-the Penny website, a daily update of the total outstanding public debt, we've been seeing breaching numbers like these for all the way back to March 2013:

Officially, however, the newly minted May 19th, 2013 debt limit of $16.669 trillion was eventually breached; on May 20th.  A single day after the debt limit was officially raised, the  debt subject to limit was a mere $25 million below the new limit.  In the obviously uncomfortable interim since May 20th, one of the saving graces for the Treasury has been the special dividends paid by Fannie Mae and Freddie Mac;  in the second quarter of 2013, Fannie Mae paid slightly less than $60 billion in dividends and Freddie Mac paid slightly less than $7 billion in dividends.  Keep in mind that while both Fannie and Freddie have been profitable since the beginning of 2012, losses on these two enterprises have totalled $123 billion while they have been in conservatorship.

Since the debt ceiling was breached yet again in May 2013, the Treasury Secretary has been forced to use extraordinary measures to keep the ship afloat.  Some examples of these measures are:

1.) The Treasury can chose to make changes to the investment policies of the Federal Employees' Retirement System G-Fund.  These funds are normally at least partially invested in government bonds.  The Treasury can temporarily reduce the amount of Treasuries held by this fund, freeing up room under the debt limit and allowing the issuance of additional securities to the public.  This cash infusion allows the Treasury to pay federal obligations.  Once the debt limit is increased, the Treasury must reimburse the retirement fund.  As of May 19, 2013, this extraordinary measure provided the Treasury with $159 billion in "breathing space".

2.) The Treasury can choose not to reinvest the Exchange Stabilization Fund, a fund that can be used to purchase or sell foreign currencies, hold U.S. foreign exchange assets and to provide financing to foreign governments.  As of May 19th, this extraordinary measure provided the Treasury with $23 billion in "breathing space".

3.) The Treasury can choose not to make new investments to the civil service and postal retirement funds.  As of May 19th, this extraordinary measure provided the Treasury with $121 billion in "breathing space".

By the end of August, the Treasury had used up all but $108 billion of the extraordinary measures available to it.  Once those are exhausted, the Treasury will have to rely on daily revenue and cash on hand to pay its bills.  The Bipartisan Policy Center estimates that both cash on hand and available extraordinary measures will be exhausted by November 5, 2013 as shown on this graphic:

The period between October 18 (known in some circles as the "X date") and early November will be a very difficult time.  Between October 18th and November 15th, the Treasury would be about $106 billion short of paying all of its bills meaning that approximately 32 percent of the funds owed for the period would go unpaid.  Handling all payments for Social Security, Medicare, Medicaid and Defense would quickly become impossible.  This could force the Treasury into a scenario where it has to do one of two things:

1.) Pick which programs to cover and which to ignore.

2.) Wait until sufficient revenue is deposited to cover an entire day's payments.  This would result in payment delays for various programs like Medicare, unemployment insurance, food stamps, Social Security etcetera.

Obviously, this is an issue that would certainly create a huge public uproar and one that would subject the United States to intense negative global media coverage.

Let's close with a look at the history of increases in the debt limit since 1993 just to put everything into perspective:

Here's a quote from the Congressional Research Service about the raison d'ĂȘtre for the debt limit:

"The debt limit also provides Congress with the strings to control the federal purse, allowing Congress to assert its constitutional prerogatives to control spending.  The debt limit also imposes a form of fiscal accountability that compels Congress and the President to take visible action to allow further federal borrowing when the federal government spends more than it collects in revenues. In the words of one author, the debt limit “expresses a national devotion to the idea of thrift and to economical management of the fiscal affairs of the government.”"

I ask, “What thrift and economical management?”.

The Congressional Budget Office has already warned that the current trajectory of federal borrowing is unsustainable and that eventually it will have a substantial negative impact on future economic growth.  With the current state of partisan politicking in Washington, it seems that the future of America's economy is being held hostage by a bunch of ill-behaved school children that would rather score political points than actually do something that is in the best interest of the entire nation.  In any case, what really seems pointless about the whole (hole) debt ceiling debate is the fact that the old debt ceiling very, very rapidly becomes the new debt floor because Washington has never learned to live within its means.  That is something that they need to be held accountable for.

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