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

Tyler Durden's picture

The debt limit was formally reached last week, and we expect the Treasury's ability to borrow to be exhausted by around March 1 (if not before) and while CDS are not flashing red, USA is at near 3-month wides. Like the previous debt limit debate in the summer of 2011, the debate seems likely to be messy, with resolution right around the deadline. That said, like the last debate we would expect the Treasury to prioritize payments if necessary, and Goldman does not believe holders of Treasury securities are at risk of missing interest or principal payments. The debt limit is only one of three upcoming fiscal issues, albeit the most important one. Congress also must address the spending cuts under sequestration, scheduled to take place March 1, and the expiration of temporary spending authority on March 27. While these are technically separate issues, it seems likely that they will be combined, perhaps into one package. This remains a 'very' recurring issue, given our government's spending habits and insistence on its solvency, as we laid out almost two years ago in great detail.


Via Goldman Sachs: Q&A On The Debt Limit (Alec Phillips)

Q: What is the debt limit?

A: It is a legal limit on Treasury's borrowing imposed by Congress. Under the constitution, Congress, not the Treasury, has authority to borrow. Congress delegates this authority to the Treasury. Instead of approving each single debt issuance (as was done many years ago) it imposes an overall limit on debt that may be issued, leaving the Treasury to work out the details. The limit is currently $16.394 trillion.

Q: What is covered under the debt limit?

A: Marketable and nonmarketable debt held by the public, the Fed, and in government accounts. Debt held by the public ($11.6 trillion) consists of marketable securities held by domestic and foreign investors ($9.9 trillion) and marketable securities held by the Federal Reserve ($1.7 trillion). Intragovernmental debt ($4.9 trillion) consists almost entirely of nonmarketable debt held by government trust funds. Most of these trust funds finance specific programs, like Social Security.

Q: When will it be reached?

A: The formal limit has already been reached but the Treasury probably has enough headroom to last until March 1. The Treasury reached the statutory limit on debt on December 31. Since then, public debt outstanding has been held at $25mn under the limit. Even though the Treasury has reached the limit, it can continue to borrow through use of "extraordinary measures."

The Treasury has instructed Congress that it expects to have about $200 billion in "extraordinary measures" at its disposal, which will allow it to continue to borrow under the debt limit. January tends to be a low-deficit month and will probably produce a monthly deficit of $20bn to $30bn. February is a heavy deficit month, and in the last three years has produced a deficit of $220bn to $230bn. This year's February deficit is likely to be smaller than those years, as is the fiscal year deficit as a whole, but it still looks likely to be at least $200bn.

On December 28, the last business day before the debt limit was reached, the Treasury's cash balance stood at $59bn. Along with the "extraordinary measures," this should allow the Treasury to continue to pay its obligations without an increase in the debt limit until at least sometime in the second half of February, even if the budget deficit is at the high end of the range of the last few years. If the deficit over the next two months is slightly lower than the last few years, as we expect, the Treasury seems likely to get to March 1 before it exhausts its funds. Likewise, if the Treasury is able to increase the amount of headroom created by its "extraordinary measures" beyond the $200bn it has estimated, it might also extend the date it would exhaust its borrowing capacity.

Q: What are the "extraordinary measures" the Treasury can use to extend the deadline for raising the debt limit?

A: The primary strategies involve disinvesting government trust funds of Treasury securities. These have been ahead of several previous debt limit increases and have come to be known as "extraordinary measures." There are three primary strategies the Treasury can use to create additional headroom to borrow under the limit:

  • Partial disinvestment of the federal employee defined benefit pension fund (creating $33bn to $93bn in headroom). The Civil Service Retirement and Disability Fund (CSRDF) receives contributions for current employees of $2bn per month and pays out $6bn per month to former employees. Once the debt limit has been reached, the Treasury may redeem securities equal to expected payments and may suspend new investments. The amount of the redemptions depends on the Treasury's declaration of a "debt issuance suspension period" (DISP). For each month it is expected to last, the Treasury can redeem one month's expected payments. In prior debt limit impasses, DISPs have been declared to last as short as two months to as long as 12 months, creating headroom of between $12bn and $72bn, along with a few billion more from non-investment of new inflows. A similar provision related to postal retirement creates $17bn more in flexibility. The upshot is a minimum of about $33bn in headroom and an upper bound of $93bn (in the case of a 12-month DISP), though the law is vague so it is at least possible that an even longer DISP could be declared if necessary.
  • Disinvesting the "G Fund" ($156bn in headroom). The "Thrift Savings Plan" is a defined contribution system for federal employees, which provides several investment options including the G Fund that invests only in government securities. Federal employees and retirees currently have $156bn invested in the G Fund, and the Treasury can temporarily replace some or all of those Treasuries that count toward the debt limit with an IOU that does not.
  • Disinvesting the Treasury's Exchange Stabilization Fund ($23bn in headroom). This fund can be used by the Treasury in a number of ways, with little oversight by Congress. The $23bn portion of the fund invested in dollars is in non-marketable Treasuries, which could be disinvested immediately if necessary.

Q: What happens if Congress does not raise the limit by the deadline?

A: The Treasury would need to immediately reduce outlays to equal income. Without an increase in the limit, the Treasury would not have cash on hand to pay obligations as they come due. Over the next three months, the Treasury is likely to spend roughly 40% more than it takes in, and without a debt limit hike it would need to immediately eliminate this deficit. While the Treasury would probably be able to prioritize spending, it isn't clear what the priorities are, and regardless of which priorities were chosen, the overall reduction in federal spending could result in a sharp downturn in near-term economic activity if it persisted for more than a very short period.

Ahead of the 1985 debt limit increase, the General Accounting Office (GAO, now known as the Government Accountability Office) advised the Senate Finance Committee that the Treasury had the authority to choose the order in which to pay obligations. Whether this opinion still holds today in light of legislation enacted since then is unclear. Prioritization did occur previously, following expiration of a temporary increase in the debt limit on July 1, 1957. As the federal government began to run a budget deficit, the Treasury was forced to delay payments to federal contractors in order to avoid breaching the limit (see for example Treasury Sec. Douglas Dillon's account of the events in "Key Areas in Current Economic Policy", Federal Reserve Bank of New York Monthly Review, June 1963). More recently, as the debt limit approached in early 1996, the Treasury indicated that failure to raise the debt limit would result in failure to make Social Security payments, though Congress provided relief before any delay occurred (see "Debt Ceiling: Analysis of Actions Taken During the 1995-1996 Crisis," GAO, 1996.)

Q: What about Treasury-related payments?

A: A failure to pay interest or principal is unlikely, as it was in the last debt limit debate. The Treasury has around $35bn in semi-annual coupon interest to pay on February 15. There is a good chance that the Treasury's "extraordinary measures" will last longer than this. However, smaller payments of around $6bn and $1bn are scheduled on February 28 and March 15, around the time the Treasury will exhaust its borrowing ability. If Congress has not increased the debt limit by that point, the Treasury seems likely to prioritize spending to make sure these payments are made or to extend its "extraordinary measures" so that it can borrow the amounts to make the payments. The Treasury's ability to roll over existing debt is even less likely to be affected, since replacing maturing debt with new issues should not add to stock of Treasury securities outstanding. Nevertheless, significant volatility could occur around Treasury auctions should Congress fail to raise the debt limit in a timely manner.

Q: If other non-interest payments are missed, would that constitute a default?

A: Not from the rating agency perspective. While some of the public commentary has referred to a failure to make scheduled payments on other obligations as a "technical default," the rating agencies are not required to respond in any particular way to a failure to make other payments. Ratings assigned by the three major rating agencies relate to the government as an issuer of securities and the payment of interest and principal on those securities. That said, a failure to make a scheduled payment could still be seen as a sign of increased risk, so it could still have ratings implications. For example, Fitch Ratings has said it might downgrade the US rating by one notch if the debt limit is not raised in a timely manner; it seems likely that an inability to make scheduled payments would trigger the type of downgrade Fitch has described.

Q: How long might the debt limit increase last?

A: It could last as long as two years or as short as a few months. President Obama has made clear he does not want to return to periodic debates on the debt limit and he is likely to push for at least a two-year extension, which would probably require an increase of around $2 trillion. House Speaker Boehner insists that any debt limit increase should be matched with spending cuts of an equal amount (when measured over ten years). If lawmakers were able to agree on a "grand bargain" involving significant entitlement cuts as well as new revenues, this could allow for enough budgetary savings (if not spending cuts) to allow a debt limit increase lasting two years or so.

However, another increase in tax revenue beyond the one enacted last week seems off the table for now, and there is little left to cut from the "discretionary" segment of the budget that was already cut significantly in 2011. The only major area of the budget left to cut is "mandatory" spending--mainly entitlement programs--but neither party has proposed more than several hundred billion dollars in specific, politically achievable cuts in this area.

If Congress can't agree on cuts to match a substantial increase in the debt limit, lawmakers have a few other options. Congressional Republicans could shift their goal to enacting a few key changes to entitlement programs, rather than hitting a particular dollar target. To make a smaller budget deal look larger, lawmakers might also consider a cap on overseas war spending, which could produce several hundred billion dollars in savings compared with official projections, even though most realistic budget projections (including our own) already assume this spending will decline. Either strategy could allow the debt limit to be increased by at least $1 trillion, good for about a year.

If neither of those strategies work out, the fallback plan would simply be a smaller increase in the debt limit. While larger increases in the debt limit that last 1-2 years have become the norm over the last decade, this was not always the case. In prior periods it was not uncommon to see increases that lasted only a few months, or in some cases just a few days. So while we assume that Congress will enact a longer-lasting increase in the debt limit this year, it would not be unheard of for one or more short-term extensions to come before the longer-lasting increase.

Q: How does the debt limit relate to other upcoming fiscal debates?

A: The debt limit is the most important of three separate fiscal issues Congress must address in Q1. Beyond the debt limit, congressional leaders and the President must work out two other issues: further delay in spending cuts under "sequestration" and an extension of government spending authority. While these are separate issues, it is clearly possible that all three could be wrapped up into one agreement.

Spending cuts under sequestration are scheduled to take effect from March 1, 2013. Those cuts had been scheduled to take effect January 1, but were delayed two months as part of the fiscal compromise reached last week. In the upcoming debate lawmakers will aim to delay those cuts once again, offsetting the increased spending that would result with savings (spread over ten years) from other areas of the budget.

A month later, on March 27, the temporary extension of spending authority (known as a "continuing resolution") that Congress enacted last year expires. Congress is likely to extend spending authority to September 30, the end of the current fiscal year, but lawmakers must first agree on a spending level. If no agreement is reached by March 27, all non-essential government operations funded by congressional appropriations would cease. However, while this sounds severe, it is far less of a risk to the economy or the market than a failure to raise the debt limit, since the lapse would be temporary and the payments that would cease are clearly categorized, would have no effect on Treasury financing nor on most payments to individuals, and are of a smaller overall size.

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Snakeeyes's picture

Of course the US is insolvent. Obama and Congress (yes, both Democrats and Republicans) refuse to cut spending and just keep running up the debt. Or have The Fed buy it.

slaughterer's picture

OT: Fuck it, I am going "all in" AA calls today.  This dog is ready to fly.   Another short slaughter ahead, no matter how "right" the shorts might be.  

TruthInSunshine's picture

This is pure gold, bitchez -- even cnBSc laughs Joe Weaselthal off the air as he tries to seriously discuss the "trillion dollar coin" ridonkulousness:

trav777's picture

oh noze, another debt ceiling limit, just like the last dozen

traderjoe's picture

If you want to End the Fed, you should be in favor of the Treasury-issued platinum coin. 

TruthInSunshine's picture

How does the gimmicky scheme accomplish that?

It's being floated, even as an exercise in mental masturbation, as a way to explicitly provide the Federal Reserve with more "money" (the debate turns on this term, as it's actually "fiat" they're proposing) with which to purchase U.S. Treasuries.

So how does this help to terminate the fractional reserve bank, let alone NOT further enshrine it as an implicit 4th branch (unconsitutionally) of government?

Tall Tom's picture

Maybe it might signal the Foreign Bankers that the United States is not serious when it considers Fiscal Solvency.

Maybe they will move to redeem their Notes as fast as possible and expatriate the US Dollars held in their reserves back to the United States.

Maybe the resulting Hyperinflationary Inferno might consume the muppets wealth and piss them off enough to see that the Fed's policies are a sham.  They will be hungry and hunger is one motivating stimulus.

Maybe after all of this is accomplished then the Muppets will demand that it be dismantled.

Maybe the Politicians will hear them out and act out of fear rather than facing the Guillotine.


traderjoe's picture

1. The Treasury is issuing the fiat - earning the Seniorage from the difference between the metal value and the face value. This is a vastly different form of currency creation than under the current system of privately issued debt money - issued by commercial banks through fractional reserve lending, at interest, with the collateral of productive assets and 'your' future labor. 

2. It would be tantamount to a default under the current paradigm. 

3. The unintended consequences, IMHO, would be that it would demonstrate the lack of intrinsic value to the FRN, and the whim with which it can be devaiued by governments. 

4. This idea is so silly, that it would completely upend the current monetary system. I am all for such silliness. 

Default on the odious debt. Cancel all legal tender laws. Issue United States Notes. Allow Freegold and silver. Let the people chose their form of money, currency, medium of exchanges, and stores of value. 

Half_A_Billion_Hollow_Points's picture

the coin exposes the Zimbabwe States of Amerika more than anything ever could.  


"Go go, get tbills!  Zero risk there" <-- even Krugman would have a hard time after this wonderful coin becomes history.

auric1234's picture

It's a FIAT coin. How is this better than FIAT paper?


traderjoe's picture

Fiat is not the enemy. The enemies are private fractional reserve banking and legal tender laws. 

If you like PM's, you should like Freegold more than a gold standard. 

auric1234's picture

Indeed, FIAT is only a problem because it is backed by laws restricting use of gold as money, such as legal tender, capital gains, etc.


kchrisc's picture

I have been avoiding the "Platinum Coin" thing because I'm too old for fairy tales, but I watched the video clip and was amazed. It was like one shill trying to out shill the others and they weren't having anything to do with it themselves. Incredible.

Watch it and wonder if the Onion has taken over things.

Additionally, this platinum coin thing is already what they do now: they print a bond and "sell" it to the FedRes for a check against "money" the FedRes creates out of thin-air.

Now think about this for a second: the US gov is so broke that it has its shills out seriously putting out there for the sheeple's consumption the idea of using an arbitrarily valued trillion dollar coin to save the day. Or is it more like Wiley Coyote--they don't want anyone to look down lest they realize that the ground is far below and then have reality and gravity takeover.

Cognitive Dissonance's picture

If anyone gave the IRS an interest free loan last year and is looking for a refund I would suggest you file early and often.

CPL's picture

Most people don't have anything to file now that most of the US population is under the poverty line.


Weird how that is never mentioned anymore.

Cognitive Dissonance's picture

Doesn't really matter anyway. The IRS said that some forms won't be finalized until mid to late Feb, just in time for the next Mexican Congressional standoff.

CPL's picture

When they do that trick in Canada (we over run our budgets regularily, set the watch to it).  It usually means layoffs are coming.  



Update your resume.  Just kidding, there is no job waiting for anyone.  lol

Cognitive Dissonance's picture

At least you got NHL hockey back to help kill the pain.

Why the hell did Canada allow the USA to take over your beloved hockey?

WhiskeyTangoFoxtrot's picture

"file early and often"

Gotta get me summa them multiple taxpayer ID numbers all the illegals have been using to file multiple returns. JACKPOT!!

thecoloredsky's picture

I think the moral of the story is to drop your social security number and become a non-citizen national (if you were born in the US) to preserve your natural rights of keeping the income you make -- aka prior 1913 -- But I do find it odd that a non-citizen "illegal" can receive benefits on top of no income tax.

asteroids's picture

Greed, learned from Amerikans of course. The expansion of the NHL, a longer season, stupid rule changes have turned it into a boring game. Pity. As a Canadian kid in the 70's, the playoffs were magic. I hope the NFL playoff's are exciting. The superbowl is pure spectacle as only Amerikans can produce.

Liquid Courage's picture

Oh yeah! The 1976-77 Habs ... only 8 losses in an 80 game season! Those were the days, my friend ... we thought they'd never end. There'll be no more dynasties like Les Glorieux of the late 70s.

Free agency ... too much money ... too many damn lawyers and agents attracted by the too much money ... too many dumb rules made by dumb-asses who really don't understand the game (Trapazoid? Are ye nuts? Can't figure out why so many D-men get their bells rung going into the corners with power forwards hot on their heels? Idiots.)

I know I'll sound like a grumpy old fart, but for me the game's Golden Age ended right about the time they changed from the old nets ... from there, the rule book started balooning up from a handbook you could read in ten minutes into a tome it takes a comittee of damn lawyers to figure out.

As pop philosopher Cindy Lauper pointed out: Money! ... money changes everything!

CPL's picture

Once someone in Winnipeg decided the businesses reasoning was sound, they moved down franchises when nobody cared about Hockey in the late 80s.  Two white guys boxing and scottish dart leagues had more viewership in the US.

They bought it all for dimes on the dollar.  Put the flashing light on the puck to get a US viewership used to ice time and strategy.  Then they grabbed guys from the Hells angels that could skate from the Gatineau region (swear not making this up) to be Enforcers.  After a couple of really impressive televised haymakers on skates, people started to actually watch it.  Beer makers Coors and Molson pushed to move NHL extensions south closer to market.

...and that's "Canadian" hockey today.  God there are some great players out of Russia and Norway...kick ass....however...I'm not watching any of them.  

If I have to pay to play a full season with a bunch of old men on my own time.  I'm certainly not turning the knob to watch a bunch of whingers play part of a season and get paid to play with pro's.


Besides leaves more time for the grand sport of Curling.  Like golf, harder you play the shittier it gets.

Liquid Courage's picture

Why the hell did Canada allow the USA to take over your beloved hockey?


Why else: $$$$$s

Freddie's picture

Hope & Change.  Rigged elections do that.

Paul Krugman's trillion dollar platinum coin will save us.

Oldballplayer's picture

Make two or three....just for yucks.

Beam Me Up Scotty's picture

Make enough so that no one has to pay any taxes again.  If one is good, 100 should be really good right?  And think how stimulative to the economy it would be if everyone could keep all of those tax dollars and spend them, right?

Tall Tom's picture

Yeah. That is good. I was just thinking 20 of them to pay off the debt completely. When we strike one hundred of them then the World can actually see how insane and stupid that we really are. Great idea!!!


So do tell me. Just how do we deal with the resulting Hyperinflation. Damn. I have to spoil the something for nothing dream with reality.

DeadFred's picture

Tax refunds will be the killer. They can keep the Ponzi going by manipulating the refund rules. If refunds take five or six weeks instead of days (due to technical difficulties of course) they might even be able to stretch this thing into cash positive April and May. I expect bugs to be discovered in the IRS software, but then I'm a bit paranoid.

Cognitive Dissonance's picture

I can't wait until the next Congressional "fix" coming up in a few months "accidently" makes some retroactive tax changes that forces 50 million people to amend the 2012 taxes they just filed.

<At least the accountants will love it. Tax season extended to August.>

I Am Not a Copper Top's picture

I always make sure I owe a couple grand and always file on last day.

John_Coltrane's picture

Me too.  I used to select 4-6 deductions on my W-2 even though I was single just to make sure I didn't overpay.  Too bad more don't do this.

CPL's picture

Market is losing steam!!


Put a guy talking about nothing on CSPAN quickly!!

Snakeeyes's picture

And if we opened Ft Knox, our gold depository, they would find enough gold to decrease the Federal deficit by 25% FOR ONE YEAR ONLY! 

How insolvent can we possibly be?

Stuck on Zero's picture

We could hand over Detroit, LA, New York, and Chicago.


Tall Tom's picture

Are you even sure that is there?

The US Mint said on its webpage in 2009

"The United States Mint is working diligently with current and potential blank suppliers to increase the supply of bullion coin blanks, so it can offer to the public the proof and uncirculated versions of American Eagle silver, gold, and platinum coins in 2010."

I have just some simple questions...

If they are working diligently with current and potential blank suppliers then they do not have the supply, do they?

If they have to rely upon OUTSIDE SUPPLIERS then do they have the Gold?

  In other words they do not have the Gold. Fort Knox is the US Mint's Gold Depository. If they do not have the Gold then Fort Knox is empty.

Winston Churchill's picture

Your card is declined, Sam.

AgAu_man's picture

Oh, wait, Uncle Sam... as long as you have real assets as collateral -- even, or especially zee Precious --  we can raise your card limit, as we like your FICO score.

lizzy36's picture

I heard they are minting a Platinum Coin and all Yank fiscal problems are solved.

So what the hell is Goldman yammering on about?

Dr. Engali's picture

Just raise the damn thing already and be done with it . You know you're going to, so stop pretending ... you look like idiots already.

laozi's picture

You have a point Sir. This debt ceiling discussion is retarded.

realtick's picture

Can someone in Manhattan go down to the Business Insider office and explain to Joe Weisenthal that money is debt and he's digging his own personal subway tunnel right now?

larz's picture

Our representatives large and small have just pulled the biggest screw job to the 'merkin sheeple I have ever seen no spending cuts and a huge tax hike all the while dangling the fiscal cliff bullshit in front of us WTF This is laughable WTF WTF WTF Republican? Democrat? try thieves - give me a frickn break. Schumer! here boy! how much to renounce my citizenship? Can I pay in a tungsten coin?

Winston Churchill's picture

Have another nationality ready first.

Unless you've gobs of money in hand,even Mexico probably won't have you.

Ness.'s picture

+500 for the merkin reference.



Thisson's picture

People will figure it out (eventually) when they see their paychecks shrinking and grocery/gas prices increasing.

NumNutt's picture

I am already seeing all that....I think you ment people will notice when they see their EBT cards no longer being excepted.