Presenting The Treasury's Options To Continue Pretending The US Is Solvent

Tyler Durden's picture

Long-time readers will excuse us as this post is almost identical to one we put up in December 2009 when the debt ceiling was last about to be breached. And future readers will likewise have to excuse us as this post will be put up again some time in November 2011, when the next deadline for raising the debt ceiling approaches. But for now, for those who still are confused by the extend and pretend options available to the US treasury, here is Goldman's now-annual (soon semi-annual, then quarterly, etc) analysis of what Tim Jeethner's can do to avoid bankrupting the United States of America, if only for the time being.

From Alex Phillips and Ed McKelvey of Goldman

The Treasury's Options as the Debt Ceiling Approaches

  • The US Treasury is approaching the $14.294 trillion (trn) statutory ceiling on its outstanding debt.  In fact, last week the agency invoked the first of several options—running down the Supplemental Financing Program (SFP)—to buy several weeks of additional time against what otherwise would likely be an exhaustion of net borrowing authority by early spring.
  •  Although a new limit will surely be approved eventually, the process of reaching agreement is apt to be contentious.  Market participants should therefore expect a period of uncertainty lasting several weeks—perhaps even a few months—before this situation is resolved.
  •  As this situation unfolds, Treasury has numerous options to create more headroom, which we estimate could yield almost $420bn in one-off relief, including $195bn from the SFP rundown, plus about $10bn per month—far more than the $299bn the Treasury expects to borrow during the April-June quarter.  Some of these options involve accounting maneuvers that rearrange internal accounts within the government, while others affect the Treasury’s external liabilities.

The US Treasury is approaching the $14.294 trillion (trn) statutory ceiling on its outstanding debt.  As of Friday, the debt subject to this limit, which covers almost all Treasury obligations—including those owed to other government agencies—was $14.004trn, or $290bn below the limit.  Absent maneuvers to create more headroom under this limit, the Treasury would likely reach it by about the end of the first quarter.
A new limit will eventually be approved, as few if any members of Congress will want to risk the Treasury’s defaulting on debt obligations.  However, the process of reaching agreement is apt to be contentious given the divided control of the US government and the pronounced differences that exist between Republicans and Democrats on fiscal priorities.  For example, some influential Republican congressmen have vowed to vote against an increase in the debt ceiling unless it is packaged with significant cuts in spending, an approach Democrats are apt to resist.  Thus, the potential exists for a period of at least several weeks of uncertainty about the government’s ability to maintain its current borrowing schedule and ultimately to pay its obligations, comparable to earlier episodes in 1995-96 and in 2003.  In fact, the uncertainty could last for a few months given that the Treasury’s cash flow is usually fairly firm—and its borrowing needs are therefore a bit lighter—during the second quarter, when the ceiling will start to impinge on its operations.
Given the potential for a protracted period of unease on this issue, we devote this daily comment to the options Treasury officials have available to them to create additional headroom under the debt ceiling, many of which were on display during the earlier crises.  We divide them into two groups: (1) moves that change only the internal accounting of liabilities with no effect outside of the government’s balance sheet, and (2) moves that have an external effect, which include one measure that has already been invoked to buy a few weeks’ time—running down the Supplemental Financing Program (SFP).  For each option, we include the rough amount of debt issuance the Treasury could forego by using that strategy.  Altogether, they amount to one-off options to create almost $420bn of relief, including $195bn from the SFP operation, plus about $10bn per month.  This is far more than the $299bn the Treasury has announced as its preliminary borrowing need for the April-June quarter.  The options are as follows:
1.     Internal rearrangement of liabilities
a.     Disinvestment of the Civil Service Fund ($72 billion (bn) up front, plus another $2bn per month):  In order to avoid breaching the debt limit, the Treasury’s authority over the Civil Service Retirement and Disability Fund (CSRDF) allows it to (i) redeem Treasury obligations of the fund as they mature and (ii) to suspend the investments of amounts coming into the fund, which are  mandated to be invested in nonmarketable Treasury debt or other debt backed by the full faith and credit of the US government.  Both strategies amount to exchanging liabilities of the Treasury that count toward the debt limit for those that do not.  The CSRDF balance is likely to be around $790bn by March 2011, comprised almost entirely of Treasury securities. The fund is expected to receive $101bn in revenues this fiscal year, and is expected to pay out $72 billion, leaving a surplus of $29bn this year.
To activate this option, the Treasury must declare a “debt issuance suspension period” (DISP), the length of which how much of these funds the Treasury can use to create room under the limit.  The Treasury may suspend investment of new funds during the DISP, and may also redeem before maturity an amount of Treasuries equal to the amount of payments expected to be made by the fund during the period.  Since the law does not dictate how the length of a DISP is determined, the Treasury could in theory announce a very lengthy period, which would allow it to redeem a greater amount of Treasury securities and buy more time under the limit.  Previously announced DISPs have ranged from a few months to one year.
b.    Suspending reinvestment in the “G-Fund” ($116 bn)
:  As with the CSRDF, the Treasury can suspend its issuance to the Government Securities Investment Fund (G-Fund) of the federal Thrift Savings Plan (TSP).  As of October 2010, the G-Fund balance was $116bn.  The G-Fund is invested in non-marketable Treasury securities that mature daily, so the entire balance of the fund is theoretically available to the Treasury to avoid breaching the debt ceiling.
c.     Disinvest Treasury securities held by the Exchange Stabilization Fund ($20bn):  The Treasury’s Exchange Stabilization Fund (ESF) was created in 1934 for use by the Treasury to stabilize exchange rates, and the Treasury has wide latitude over how the $105bn in funds in the ESF are invested.  The ESF currently holds $20.4bn in non-marketable Treasury securities, which it could disinvest and hold in cash. 
d.    Exchange Federal Financing Bank (FFB) debt with the CSRDF ($15bn).
  Although it is part of the Treasury, the FFB is subject to a separate limit on its debt issuance, set at $15bn.  The FFB typically issues debt in order to purchase securities issued by other government agencies.  The CSRDF has authority to hold debt issued or held by FFB.  During debt issuance suspension periods, the Treasury can exchange FFB debt, which does not count against the debt limit, for Treasuries held by the CSRDF, which do count against the limit.
2.     External rearrangement of liabilities

a.     Run down the Supplemental Financing Program (SFP, $195bn)
.  The SFP was created in September 2008 to help the Federal Reserve expand its balance sheet without increasing the volume of excess reserves in the banking system.  Under this program, the Treasury has been issuing special cash management bills (CMBs) and holding the proceeds of this issuance on deposit at the Federal Reserve.  At its peak in December 2008, the outstanding volume of SFP bills was $550bn; however, since early 2009 it has been stable most of the time at $200bn in a rotating cycle of 8 56-day CMBs of $25bn apiece.  Since this debt counts against the debt ceiling but merely funds a larger-than-needed cash balance, it is an obvious first step to tap this source of funds.  In fact, last Thursday the Treasury announced that it would run the SFP balance down to $5bn beginning this week.
b.    Suspend issuance of SLGS ($5-10bn/month):  The Treasury issues a special State and Local Government Series (SLGS) of securities that state and local governments may purchase to invest the proceeds of tax exempt bond issuance.  Suspending SLGS issuance is another of the initial steps the Treasury typically takes as it runs out of headroom under the debt ceiling.  As of January 28, $187.2bn was outstanding in SLGS; however, the rate of monthly issuance is fairly low—around $8bn in December.  News that this program has been suspended could come as early as the refunding announcement due this coming Wednesday morning.
c.     Financial asset sales ($156bn, but unlikely to occur)
:  To our knowledge, the Treasury has never engaged in the sale of financial assets to avoid reaching the debt ceiling.  However, for most of its history the Treasury has not hold significant amounts of liquid financial assets.  Times are different now.  As of December, the Treasury held $155.6bn in GSE mortgage-backed securities purchased in 2008 and 2009 as part of the program to support the agencies.  These purchases were funded with Treasury issuance, and sale of these securities would allow the Treasury to forego net issuance for several weeks.  However, unlike the accounting maneuvers described above, the sales would be permanent, since the Treasury’s authority to purchase GSE MBS has expired since these securities were acquired.  Given the political importance of the housing market and the potential for complicating the upcoming debate on overhauling the GSEs, sale of these securities seems unlikely as anything but a last resort.  In theory, sales of assets held by the Troubled Asset Relief Program (TARP) could also be used to create headroom under the debt ceiling; the Treasury seems unlikely to time these sales based on debt ceiling considerations, but sales of stakes in AIG and auto-related holdings could net tens of billions of dollars in proceeds, depending on market conditions.
d.    Suspend federal payments:  Although we don’t expect the showdown over the debt limit to come to this, if the delay in raising the debt limit were so long that the Treasury exhausted all other options such as those listed above, we would expect a decision to suspend payments to employees, contractors, and potentially to beneficiaries of federal programs, rather than fail to make payments of principal or interest related to Treasury securities.  Some congressional Republicans opposed to raising the debt ceiling have introduced legislation to legally prioritize payment of principal and interest over all other obligations incurred by the federal government.  This is very unlikely to come into play, but it is worth noting that even assuming the worst case scenario in the congressional debate over a debt ceiling increase, payment of interest and principal would not be at risk.
As noted above, passage of an increase in the debt limit will occur at some point, because the consequences of not enacting an increase are too high.  However, it is quite possible that this issue could stretch out over several months, with one or more small increases (e.g., $100bn or $200bn at a time) to buy additional time as lawmakers try to fashion a more lasting solution.  And even once this occurs, the issue will recur from time to time until the federal deficit comes down.  After all, the last increase—of $1.9trn—lasted barely more than a year.  So keep this daily comment handy.

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Id fight Gandhi's picture

What about the 5.5T in GSEs? Why is that not counted on the balance sheet?

Atomizer's picture

Foreign direct investment; net outflows (% of GDP) in Egypt

SDR allocation

SDMX Global Conference 2011


SDMX Forum


Attempting to understand the MSD Samples

« on: January 26, 2010, 05:57:20 AM »


In attempting to understand how MSD's and Metadata Reports work, I was looking over the documentation and sample files provided in the SDMX 2.0 release.

According to the Schema and Documentation document (3A), in section 6.6.4:


4880 A complex type will be declared with the name “MetadataSetType”, and it will contain
4881 a complexContent element. Inside of this will be an extension element with a base
4882 attribute value of “metadatareport:MetadataSetType”. Inside of this will be a
4883 sequence element. For each ReportStructure element in the
4884 MetadataStructureDefinition, there will be an element declared which has the name
4885 of the id attribute of each report structure.


The sample schema "IMF_CONTACT_MetadataReport.xsd only contains two elements in the MetadataSetType, however, PRIMARY_CONTACT_INFO and CONTACT_INFO.

So, do these two files not match up, or am I missing something?


Ken Gross
Federal Reserve Board,19.0.html




straightershooter's picture

TD, I reckon you missed a small detail.

Fed would treat any bond loss as the liability of the Treasury, and, hence, the invisible Gen Ben would never suffer a loss. Similarly, the treasury would put all loss from GSE as the liability of the clueless US sheeple.

The US, represented by the treasury, would never suffer a loss, just like Gen Ben.

Ceiling, What ceiling?

Michael's picture

I'm watching a bit of Timmy G. on Blomberg World Economic Forum. The guy looks like he needs to up his dose of Ritalin for his constant fidgeting, arms and hands flailing around like a maniac, and get prescribed with Requipt for his uncontrollable restless leg syndrome.

Timmy has nothing significant to say, talking about everything that is already a given, talking in meaningless riddles, repeating confidence, confidence, and more confidence, bla bla bla.

Confidence is a subjective state of mind. What does Timmy think he is going to accomplish with that? Brainwash the mindless drones into believing an alternate reality? I think the real problem is objective reality, not subjective confidence.  

A Nanny Moose's picture

Between the hair, the fidgeting, hand waving, and all out dissembling, you suppose Timmeh is into the nose candy?

Michael's picture

That was my first thought. Confidence is high he is on something.

The moderator was looking down at his fancy foot work a lot.

TruthInSunshine's picture

It is widely rumored Timmay Geithner was a smurf for meth gangs, before landing a plum job at the NY Fed.

Old habits die hard.

Quixotic_Not's picture

Inflation is coming

Dr. Housing did an excellent write-up today:

Is housing hiding inflation in other sectors of the economy? CPI gives housing a 42 percent weight and this has obscured rising costs in medical care, education, food, and energy. It has also given the Federal Reserve another excuse to digitally print more money.

Funny, I didn't see it on ZH...

pamriallc's picture

gse debt will be irrelevant.  cash in the financial system is growing very, very quickly.  the Fed cannot continue raising reserve requirements and will need to soak up this excess cash through another program.  the GSE wind-down will occur in the next 18 months, pulling that freshly created liquidity from the system.  the treasury will have the mone center banks acquire pro-rata share of the GSE's for wind-down operations.  a low return method of soaking up excess cash in the system.


there is maybe 7 TLN in mortgage debt in the syste guaranteed by the GSE's.  there's equivalent MBS in the system with a 5% coupon.  current cost of funds is near zero on the short end.  the average life of this MBS ortfolio is closer to 10 years leaving 3%+ for banks to feast on as a spread for the luxury of holding MBS as a long term asset as they wind themselves down.  the combination of the US banks being in aggregate, the most overcapitalized in the world at this time, and the record cash created given current spread levels, GSE wind down at the money center bank level is a real solution.

the "real" losses may be there but the "nominal" losses will be nonexistant relative to the spreads enjoyed and ultimately, interest paid.  the loss to the taxpayer has always been the "difference" and not the entire nut relative to GSE debt.

at the end of the day, a 7TLN portfolio generating $210 billion in spread related income is a fine asset to own so long as you don't get CONTINUOUS losses exceeding 3% P/A forever moving forward.  the banking system is wildly overcapitalized and as such, is a great place to carve up the GSE's and soak up the excess capital so it doesn't find itself into the syste, creating yet more inflation.  as this spread rolls off and the portfolio winds down, it may serve to create a 5% P/A spiggot which will need to be reinvested at a later date when considering principal payments plus interest rate spread rolling off in the future.

we'd suggest that this use of the banking system's excess capital is imminent, and that the "spread loss potential" in the portfolio, perhaps it's 8% of gross portfolio value over the next 10 years?  would easily be papered over with the 2-3% internally generated spread on the assets.

this doesn't create "real returns" at all, but it will create nominal returns.  the treasury will not need to count this GSE debt in the future.  it doesn't make sense now, the liability is not the same as other open-ended liabilities as there are tabgible assets on the other side, and the spreads enjoyed, while reasonably narrow, will be nominally positive over time, covering even an additional 8% default vs gross current issuance, not to count the average life of the underlying loans, which is probably 10-15 years ve the 30 years final maturity on fresh mortgage contracts being created today,  they still end up with a 10-15 year average life.

gse debt doesn't need to be claimed as an open ended liability by the Treasury.  it needs to be shifted to the banks who will have claims on the underlying assets (homes) and at this point, MBS delinquencies are in aggregate decline vs the current pool of GSE debt outstanding relative to the MBS currently in the system as it's rolled over and recreated.  ugly but effective, the GSE debt situation is banked by a continuusly changing pool of homes against quich the debt is guaranteed.  at *this* point in the system, the risks are more to the upside over 10 years vs home prices, and while interest rates may rise materially, the spreads are locked down and thus, interest rates become irrelevant vs the current pool and its related GSE debt.  the loss is only on the spread between these two items, interest collected vs MBS principal and interest payments.  over the next 10-15 years that gross spread will be positive, leaving low but generally (nominally) positive returns in its place.  this serves to soak up the excess liquidity being generated in the system, leaving the Treasury free from GSE related liabilities.


shawn a. mesaros, pamria llc

dick cheneys ghost's picture

dont apologize for anything. keep writing and educating. ive learned more for this website in the last 6 months than i had in a life time. 

Former Sheeple's picture

Dick, i agree fully. TD, ZR & Crew have given me a crash course like none other...many thanks to all zh-er in training!

sabra1's picture

but, but, you are only 6 months old!

Crime of the Century's picture

Some congressional Republicans opposed to raising the debt ceiling have introduced legislation to legally prioritize payment of principal and interest over all other obligations incurred by the federal government.


StychoKiller's picture

I read this as:  Let granny on Social Security starve so some foreign bondholders don't get inconvenienced!

granolageek's picture

I and my various employers have paid into FICA for 40 years. Trust me, I'm already really upset at every bankster or republican that claims PIMCO should get 100 cents on the dollar and I should get nothing.

Speaking of Iceland, remember that picture of torches around the presidential residence? They use flashlights just like we do. Somebody made several thousand torches just to make a point.

Hephasteus's picture

Imagine a society that invents senior bond holders, junior bond holders, perfered stock holders, and fuck you in the ass you unsecured peasant scum common stock holders, adapting this system to their debt payment.


docj's picture

This is very unlikely to come into play, but it is worth noting that even assuming the worst case scenario in the congressional debate over a debt ceiling increase, payment of interest and principal would not be at risk.

Just in case anyone wasn't clear about who works for whom in this Bankster-Government cabal.

Besides, look at the screwing Barry O gave to GM and Chrysler's senior bondholders.  You don't think for a second he's unwilling to screw-over literally the rest of us if it buys his seat on the last plane out of here to the non-extradition treaty country of the banksters' chosing, do you?

stewie's picture

Geezzz, plenty of cash to go around!

apberusdisvet's picture

We should have defaulted in 2008; marked everything to market; sent all the fraudsters to Gitmo.  That's what Iceland effectively did, and after 2 years of austerity and pain, their GDP is on the increase.   I would move there if they'd give me residency (they have some great looking women and many speak English).

Oracle of Kypseli's picture

BTW: Almost all speak English and they are on the top five in literacy rate in the world. Last time I was there I overdosed on fresh fish.

sushi's picture

I overdosed on fresh women. Volcanic!

saulysw's picture

So what is the guess on the new limit? $16T is mine...

Zero Govt's picture

c.    Financial asset sales ($156bn, but unlikely to occur):  As of December, the Treasury held $155.6bn in GSE mortgage-backed securities purchased in 2008 and 2009.

$156bn of pixy dust you mean.... Timmy is a career public servant (crone), he knows about as much about investing as fellow crone, Ben Bernanke. US property dropped 3.9% in a month end of last year. Was that revalued on the Treasurys books?

You can expect a 20-30% drop in US property in 2011. The Fed and Treasurys MBS's are going to turn to shit, sorry, pixie dust.  

Poor Grogman's picture

It's great that it (eventual default) is taking it's time.

This equals more opportunities to educate others and get your own house in order.

Also no-one can say "we weren't warned" (although I bet they nearly all do).

Two consolation's

1. Money can be used for heating if you have a slow combustion heater

2. The ponzi was fun while it lasted (sort of)


lsbumblebee's picture

I vote we stuff Congress into a giant intestine and make our own pork.

I guess a certain bullion depository hasn't been used for some time now:

"Senate Republican leader Mitch McConnell of Kentucky, for example, said he’s unalterably opposed to the bill, but it still had $85 million of his earmarks, including $18 million for a railhead upgrade at Fort Knox ..."

Zero Govt's picture

The pork sausages idea doesn't sound too appetising but putting Washington through a meat grinder is an idea that still works

Convolved Man's picture

How about telling our creditors the check is in the mail?  That should give Treasury about two weeks considering all the snow we've been experiencing.

Oracle of Kypseli's picture

Bernanke's only prayer is a new ice age.

This is not going to end well. It's going to be very bad globally and it's going to last some time. It's going to happen suddenly and unexpectedly.

I think the only people unaffected will be the remote residents of mountainous areas like the Andes, Himalayas etc. (think horses, rivers, water springs and sustainable agriculture.) 

Convolved Man's picture

I'm expecting to be living as the Amish do next door, although things may get even a little more low tech -- no electricity, gasoline or propane, and just locally grown food.

SayTabserb's picture

This can induce motion sickness if you're not careful. I swear I read at one point that the "Treasury can redeem its Treasuries." Also, so the MBS on the Fed balance sheet can be sold by Treasury if it wants to raise cash? Isn't going around in circles like this the stupidest freaking thing in the history of the world?

OMG's picture

If you are going to use Fed notes for heating I recomend the rocket stove.

mark mchugh's picture

First time I've seen a rocket stove reference at ZH.  Respect!

saulysw's picture

One of the joys of Zerohedge, you never know what you might learn. Today, for me...

Instant Karma's picture

When people talk about a "bubble" in the price of gold, tell them that all the gold that's supposed to be in Fort Knox (about 8000 metric tonnes), would only finance the US budget deficit for about 3 months. Would only pay off about 2% of the US total debt.

Flatchestynerdette's picture

Conspiracy theory light bulb just went off: Egypt's ruler and his family has lots of gold. Funny how the price of gold dropped just 2 weeks before he was locked in his mansion and now on his way out of the country and has to cash in that gold which will mean the price of gold will go down as he pays for protection and housekeeping. You know, the staples of life.

Jasper M's picture

I brought that up on "seeking alpha", and the they 'thumbs down'ed me into oblivion. Some places, you are not allowed to notice gold going down. 

Or AAPL, either. Oh, well, I'd rather be right, and wealthy, than popular. Until the mobs come – allergic to guillotines  

treasurefish's picture

Why not just END THE 'EFFING FED?  Simple enough - isn't it?

Flatchestynerdette's picture

I'm numb that this is still going on from 2009. As such the powers that be have exactly what they want: nobody paying attention to this anymore as we've thrown up our (cookies) hands in a WTF action because nothing has happened to stop this crazy train.

davepowers's picture

or, instead of opposing QE, we encourage more and more of it until the FED owns ALL the US treasury debt in the world.

THEN, the Treasury defaults.


LehmanRefugee's picture

you forgot one more asset that can be sold. Treasury is sitting on $500 bn of gold at todays spot prices. I won't hold my breath for it though because that would be a sure fire way to Armageddon.

Boilermaker's picture

I have it on good information that they might ramrod the equities markets higher.  I'd like to discuss it further but I'm hypnotized by the futures climbing a point every 30 seconds....gotta go.

mark mchugh's picture

Yeah but will we ever face the fact that there is ZERO real demand for US Debt?

tahoebumsmith's picture

Anybody ever stop to think about what's going to happen when this whole debt ponzi implodes on itself? No really? We will have shot all our bullets in target practice and the Army will be approaching. Life as we know it will never be the same. I say get off the grid and tape lots of episodes of the Andy Griffith Show so you can watch them with your solar storage and remember what America use to be like.

brodix's picture

Yes, it's all blowing up now, but Federal debt is the basis of our monetary system. The government doesn't budget, they just put together these enormous bills and add enough to get enough legislators to vote for it. That's like promising a fat kid a candy bar for eating the Happy Meal. Budgeting is to prioritize and draw the line at what could be afforded. If the government actually wanted to budget, they could break those bills into their "line items," have every legislator assign a percentage value to each line, put it back together in order of preference and have the president draw the line at what could be afforded. Since the few items on the line would have a smaller constituency than those being asked to pay for them, there would be little inclination to overspend.

  Unfortunately this would seriously reduce the amount of Federal debt being produced and collapse the debt based monetary system.

 The story is that Volcker cured inflation by raising interest rates, but how does raising the price of capital reduce an oversupply of it? The Fed tightens the money supply by selling debt, but the Treasury also sells debt and lots more of it. Coincidentally the Federal deficit exploded at the same time that Volcker was allegedly curing inflation. Not only does the Treasury sell far more debt than the Fed ever has, but it then spends the money collected in ways which support further private sector investment, thus having a multiplier effect on reducing surplus capital.

 By the Fed's own logic of selling debt to draw down the money supply, surplus capital is in the hands of those with a surplus of capital, not in those borrowing it, so it actually rewards the supply of wealth with higher rates and punishes demand with the same.

 Capital is subject to the laws of supply and demand. It is the borrowers who determine how much wealth the economy can hold. Unfortunately it's those who hold the capital who control the economy, so they constantly need more borrowing to maintain all this notational wealth. 

 Consider all that defense spending, wars, etc. What do they do? Spend money, so more has to be borrowed....

 Now it is completely spinning out of control, as the feedback loop goes parabolic. When we crawl out of the cave after this all blows up, we need to treat money as the public contract it is, not some magical paper for everyone to chase around. Its only value is in the faith society holds in it. Nothing more and nothing less. When everyone is trying to cheat everyone else, the economy falls apart and there is nothing to trade for those pieces of paper.