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Prioritization Of Payments: Would They? Could They?
One of the most frequent questions related to the debt limit is whether the Treasury could prioritize payments in order to remain below the debt limit while continuing to make what it deems to be essential payments. As Goldman explains below, technical complexities and legal uncertainties might prevent a full prioritization of all payments, but they do believe (trillion-dollar-coin idiocy aside) that the Treasury could ensure that enough cash is available to make interest payments on Treasury securities.
Via Goldman Sachs,
There are two sources of uncertainty about the Treasury’s ability to prioritize spending:
Legal authority: Some have argued that the Treasury’s authority to prioritize payments is unclear. This is obviously a complex legal question that we cannot answer. We can, however, point to past precedents. Ahead of the 1985 debt limit increase, the GAO 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 is uncertain, since the legal justification at the time was not specified and the effect 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 that year, the Treasury was forced to delay payments to federal contractors in order to avoid breaching the limit.4 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. The result was that Congress provided authority specifically to issue debt to fund Social Security payments, as an interim step prior to passage of the debt limit hike.
Technical considerations. The Treasury’s position on prioritization is that its systems are designed to pay all obligations as they are due, and do not allow the Treasury to set a priority of payments to pay some obligations and not others. Considering that the Treasury makes around 4 million payments per day,
this is not hard to believe. Even if full prioritization across all
payments were possible, it seems unlikely to work smoothly in practice.
While these challenges might prevent prioritization of each Treasury payment - i.e., it might be impossible to pay entitlement benefits before defense contractors - we would expect that if it became necessary, the Treasury would still find a way to separate principal and interest payments from the rest. It is worth noting that those principal and interest payments, unlike other Treasury payments, are made through the Fedwire system, which could allow easier segregation from other outlays.
Other Creative Ideas Might Be Considered
In the event that the Treasury deems prioritization of interest payments impossible or illegal, a few other options might be considered.
Make payments in arrears. According to a 2012 Treasury Inspector General report, the Treasury considered in 2011 whether to cease making all payments for a given day until enough tax revenue had been received to cover a full day’s worth of payments. At that point, the Treasury would make that particular day’s worth of payments, and then cease payments again until adequate cash had arrived for the following day. While this plan might work in theory, the practical problem is that on November 1, the payments the Treasury must make are so large that the Treasury would already be nearly a week in arrears after the first day it has depleted its cash (Exhibit 4). So while this sort of strategy might be employed, the practical effect in early November would probably be indistinguishable from a decision to cease payments entirely.
Extend the “Debt Issuance Suspension Period.” One source of potential additional headroom under the debt limit would be for the Treasury to declare a longer “debt issuance suspension period” (DISP). Following ad hoc actions taken during the 1980s debt limit debates, Congress established specific rules around what sort of “extraordinary measures” the Treasury could take to conserve headroom under the debt limit. This particular provision of law allows the Treasury to disinvest intragovernmental debt - this is counted toward the debt limit—from the Civil Service Retirement and Disability Fund (CSRDF) in an amount equal to the expected benefit payments from that fund over the course of the DISP. The upshot is that with each additional month of DISP that the Treasury declares, more benefits would be estimated to be payable during that period, meaning more intragovernmental debt could be disinvested, which would result in more headroom under the limit. However, the law is not very prescriptive regarding how the duration of the DISP should be estimated. The Treasury under the Obama administration has interpreted this authority conservatively, and the current DISP runs only through October 17, 2013. However, if the Treasury had no other options, it is possible that it could opt to extend the DISP for a longer period. For example, the Treasury in late 1995 announced a 12-month DISP. Monthly benefits run at about $6.4bn per month, so if this were done again it could provide as much as $75bn to $80bn in additional headroom under the limit. Of course, the Treasury is unlikely to want to provide Congress with any additional motivation to delay the increase in the debt limit, so in our view the Treasury might only consider such an approach in the event that an interest or principal payment on a Treasury security were at risk.
In addition, there are several less plausible theoretical ways in which Treasury could raise more cash than it “costs” them in terms of room under the debt limit. For one, Treasury could issue very high coupon debt would be auctioned at a premium to face value. (In contrast, Treasury normally auctions coupon securities at a very slight discount to face value.) Under this scenario, Treasury would essentially be swapping an out-sized up-front cash flow for a promise to pay above-market coupons in the future.
Alternatively, given that some debt auctioned in recent years is now trading at a discount to par (in light of the rise in interest rates since early May), it is possible that Treasury could raise cash to buy back debt trading at a discount, retiring a greater amount of par value than the amount raised. However, the amount of money that could be raised under this scenario is limited.
Some readers may notice that other oft-discussed ideas such as invoking the 14th amendment, minting a platinum coin, or selling government assets are absent from our list. Our view is that while one cannot rule out any particular approach if a crisis develops, the Treasury has ruled these out on numerous occasions and there is little reason to expect that the Treasury would pursue them any further. They also come with serious risks. There are legal questions surrounding the constitutional and platinum coin strategy. For example, if the 14th amendment strategy were challenged, holders of Treasury securities would ultimately depend on the courts to ensure their validity.
The platinum coin strategy and asset sales face practical constraints. The platinum coin strategy, while intriguing, would have significant implications for the Fed’s balance sheet and could call into question the independence of the Federal Reserve, which would have to accept it in order for the strategy to work (the Fed and the Treasury have both publicly rejected the approach).9 The Treasury could potentially sell assets like gold reserves or the student loans it holds, but as a practical matter this is also unworkable. Not only would such sales send a troubling message to the markets and the public, but they would take quite a bit of lead time to arrange. By contrast, asset sales would presumably only be considered in exigent circumstances when there would be little time to structure a transaction.
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<------ Guys, a round of applause for ZH. If it were not for these guys we would NOT have frontrow tickets to all of this.
From the people who decided to shutdown www.amberalert.gov
make no mistake they will do anything they effing want to advance their agenda
and if they "think" a technical default could mean the end of the Tea Party they will do it in a heartbeat
They are getting back to what they are really good at. Cooking the books.
why would anybody entertain such doom and gloom scenerios is beyond me ...
I have seen this act before, folks. These Jewish magicians are astounding! You simply will not believe some of the tricks they will pull on the audience.
The Amazing Black Jack Lew
Top 10 Jewish Magicians and Illusionists:
* Honorable Mention: Al Flosso, Howie Schwarzman, Ricky Jay, Steve Cohen, Chan Canasta
Jamie gets paid first....Is this possible, could these ridiculous republicans have grown a pair?
Talk about living pay check to pay check ............ lord help us.
Except it's a perfectly decent paycheck, handsome by most standards, but we spend 25% of it on ammo, guns, and RC craft, 25% on taking care of our elderly neighbors, making sure they have somewhere to stay and all the drugs they could want (heaven forbid they exercise for their heart instead of take statins), 25% making sure everyone in the neighborhood gets band-aids on their boo-boos, 25% making sure there's always food if anyone's hungry, and 2% for keeping our kids 23rd in the world in math.
Should we model our own budget on theirs? I'm still a bit iffy about spending 30%ish more than what I earn, I was just thinking about spending a quarter of what I earn on weapons ...
Largely a function of what you do with the money. If your plan is to set up tents in all your neighbors yards and buy more guns than you have fingers to pull triggers, I'll vote you down too.
GMad, you forgot $$$ amount to bail out your gambling addicted deadbeat banker uncle
The Tea Party is just getting started. Wait until all the real fireworks start.
Remember this...for every 1% rise in interest rates on the national debt another $120 Bil. extra is needed to pay on that debt. A default is a near certainty.
Also, say what you will about Boehner (ha), but when he spoke of the Constitution and how BammyCare will "force Americans to buy a product, a product they can't afford", it resonated with a soon-to-be landslide of angry citizens.
re avalanche of angry zombie proles when they're woken up after seeing how badly they're being robbed, and in the most unfair way of communism: from each according to what we can take, to each according to how much they can force us to pay them.
Young males in good health will be hardest hit: they pay for the sickly, and they pay for their elders, and they pay for females.
But what about the self-employed? How the hell can they know how much their healthcare will cost until their tax yesr is over? Think about that if you've ever filed Schedules C, SE, and F 4562. Many self-employed only learn in April of following year how much after-tax income they received in prior year, the prior year in which their healthcare cost depended on their CURRENT income. What am I missing here?
Are there any tax pros here who can explain how it's set up to screw the self-employed?
I came to the same God-awful conclusion last week after pulling all our info and data together. Because I can't say with anything more than a plus or minus 25% guess, I am going to have to decide whice policy to buy and wheter to buy at all with really no idea what the final price will be.
So again, we'll have to pass (the check) in order to see what's in it.
Hmmm .. yes, curious, eh. Who are the people who have control over the "front row tickets?".
Thank God they can at least pay the interest on the debt. Don't want a nasty default.
<The US Gvt defaulted a long time ago when they encouraged inflation and discouraged the proper reporting of it. This is why 30 years ago one salary could support a household whereas now two are needed.>
exactly. and lets hope they come to their senses and reclassify the interns as essential workers ... think how much that would boost "the GDP" ... i would buy the rumour (iam just starting ...) about interns back to work!
Fun times of for us ... the muppets ... finally - thank God!
This is nothing but theater folks.
The government is still taking in tax money, so the money is there to spend. As long as the treasury chooses to make the payments, the money should be there to do so. Naturally, if they decide to give priority to interest payments, certain otgher things would get bumped such as military pay, SSI benefits, medicare reimbursements, etc.
The show must go on. Well, that's enough of the circus for me, time to go and get in line for my bread ration.
tax money? you got to be joking ... why the need for QE then? the numbers are stronomical, and we cant be told the real numbers because WE CANNOT HANDLE THE TRUTH
We have a pretty good ballpark of the "real" numbers... QE is necessary because capital always finds a way to collect the rent.
Who is it we 'have to pay our bills to'? The Central Banksters, kept alive for years only by throwing taxpayer money at them hand over fist...now on top of the bailout money they're demanding the interest too for bigtime bonuses. It's a big bankster fuckover 100%, but people feel it's OK just as long as their stawks don't drop.
China.
China my ass.
"To put China's ownership of U.S. debt in perspective, its holding of $1.2 trillion is even larger than the amount owned by American households. U.S. citizens hold only about $959 billion in U.S. debt, according to the Federal Reserve."
46% is held by foreign parties. 1/3rd of that is held by China and Japan alone.
Even if you don't get it, China does!
'Ooo it's all about CHINA again, see?'
Downvote all you like, I don't believe a bit of that shit for a second.
What you lack in intelligence you compensate for with tenacity.
Get em, Tiger!
China owns that $1.2T of US treasuries for one reason, and only one reason. It allowed them to be classified as a Primary Dealer and go directly to the Discount Window. In other words, China gets to operate just like a TBTF Bank. $1.2T was just an "investment" in a "pay to play" bigger scheme. The Chinese see what is coming. QE to infinity and beyond will result in the FED buying ALL treasuries eventually. China will be made more than whole with their "investment" just like ALL TPTF banks. Watch and see.
THEY HAVE NO CHOICE NOW CAUSE IT'S TOO LATE!
http://www.youtube.com/watch?v=ZScn9gWvjrQ
The US Gov should start selling assests while there's still some buyers for them. Sell the stupid Stategic Petroleum Reserve now that we have fracking to save us. And dump the USPS along with stupid NASA missions to Mars cuase we're not going there for 100 years at least. And get rid of the Departments of Uneducation, and Homeland Insecurity and stop the useless war on drugs.
"now that we have fracking to save us....."
(facepalm)
Tom Corbett, is that you?
These bastards have done anything they want to make the numbers come out like they need em to for whatever the priority du juor is. What makes this time different is the administration's willingness to inflict as much pain on people and exact revenge on enemies for the sake of their political agenda. And then blame it on the only real Patriots involved. Bastards, assholes and narcisstic petulant pussies!
Just to state the obvious ... THE TREASURY HAS BEEN DECIDING HOW TO PRIORITIZE BORROWING AND SPENDING FOR AS LONG AS I CAN REMEMBER. Congress is, from a practical standpoint, irrelevant.
BTW, where does the tap into Goldman Sachs come from? The majority of the bank positioning/propaganda comes from GS, not JPM or MS. I get that GS is doing gods' work to be the "face" running the global financial system... but maybe taking what GS says for granted is a "not-too-clever" thing.
Everyone knows this is all bullshit right? Someone's gona fold like Chris Christy's chin.
Please do not assume that there is ANY disagreement between parties. The "so called" shutdown was planned from the start to accomplish other things. Once you realize that, you can pretty easily see the things that they wanted to accomplish via this action, such as decreasing freedoms and information flow.
I agree the furlough will have an impact on propaganda and the ability to keep ICE detention centers open 24/7, but I think I can live with that.
Everyone knows that the real negotiations start five minutes before (or after ) the deadline. Everything before that is sight-seeing. When is the real deadline? Wake us up then.
I don't think so ... I think it was planned months, maybe years in advance.
Like the acres of trees laid flat by the pyroclastic flow of his flatulence.
Come to think of it, that'd be a great title for him..."Yes, your flatulence, right away!"
Remember the debt clock has been stopped for the last several weeks while the SecTrsy loots the gov't workers retirement contributions, thereby "bailing-in" that group. That will have to be repaid out of new debt funding so it's all part of the freakin charade. "We make the numbers say whatever we want the numbers to say"!
Lying cheating stealing bastards
Can't shake the devil's hand and say you're only kidding...what'd they think would come of a life of "public service"?
The stupidity and crookedness of the players does not make the game itself bad. The day that nobody believes that this country can be saved is the day that we are well and truly fucked.
I know that's a little hypocritical of me to say now. I bailed when I should've dug my heels in further and made everything that much harder for the looters. I'll probably spend the rest of my life trying to make up for that moment of weakness.
Look, this is all show (as many have commented). But to what end? It is designed/feigned to destroy the last vestige of any spending restraint: the debt limit itself. Boner is feigning/posturing as prudent protector of fiscal restraint. Yeah right, I know, that's a good one.
Instead, this show will create a mini-catastrophe that will be blamed simultaneously on the republicans (deserved) and on the debt ceiling itself. Answer: remove the debt ceiling requirement. Index it to CPI or some other manipulated measure, and presto! problem solved. This is the last ditch, and we have reached it.
Removing the debt ceiling so spending can rise unrestrained by the limitations of Constitutional authority is the same as knocking the ceiling out of your house to accomodate a sewage overflow. Why not fix the source? Cut the out-of-control spending!
Oh yeah, you just want to blame the repubs. Be narrow minded if you must but brother both parties are spenders and while I'm sick of both I will back anyone that can reduce gov't's chokehold on our economy.
Yay go blue team! It's the damn red teams fault....Imbecile
Oh, sorry. I should have been more clear in my sacrasm about the potential "solution," Doctor Kettle. My point was simply both "sides" are playing against the middle (us). I have no book for either side in this false but colorfully coded dichotomy. My point was those in power may use any resulting "crisis" as a means to remove the last vestige of spending constraint. To be clear for the puerile-minded, that's not a good thing, it's just a possible (undesirable) outcome.
expressly places all debt payments before all other government expenses.
Cue the one $Trillion platinum coins, the funding "solution" that even ersatz-Nobel prize winners, like shit-for-brains Krugman, take seriously.
I shouldn't be surprised that Goldman is floating this turd of an idea, and yet I am. Surprise = naivety.
Would they? Fuck no! Silly question!
Votes lost or gained are the priority.
Call in the recievers.
They never get the priority wrong:
ME FIRST ASSHOLES
Some would suggest this has been a DIP project for China since Clinton. ;)
Just payment in arrears to Medicare. There's NOTHING a hospital can do. They're not going to shutdown. The individual states have been doing it to them on Medicaid for years. It hurts the safety net hospitals the most, but they can always "buy" time.
Its not like the federal govt. is running into some real-world limit on its borrowing abilities. The debt ceiling is arbitrary. Congress could raise it to $50 trillion or $100 trillion, and then we wouldn't have these troubles every year or two. I understand that having a debt which is many multiples of the GDP will cripple the nation in short time, but since congress seems incapable of making any significant cut in spending they might as well remove the debt ceiling issue.
The fact that we have a debt ceiling that always gets pushed higher is a ridiculous notion. From my perspective, we should eliminate the debt ceiling and market forces (f not the bond market then it will be the FX markets) will eventually force more fiscal responsability on .gov.
Your theory sounds plausible, but the reality is the elimination of the debt ceiling will allow Congress to spend with no controls whatsoever. This will force the Fed to monetize the debt directly (instead of the quasi-direct circle jerk that is going on now, but essentially still monetizeing the debt anyway). In other words, the Fed will get Congress to mandate that the Fed buys all US treasuries. That is the only way they will be able to keep the ponzi going. The Fed already holds some 30% of US treasuries. With no Debt Ceiling, it will soon hit 51%. At that point it won't matter because that means the private bond market will be obliterated. Hell, it's already dead for all intents and purposes. Once the Fed holds 51% it will be codified in law by Congress because the reality will be that the bond market is dead anyway, so they might as well right the epitaph, and that will be writen by Congress. Then it will be game over because that means the gov't will have sanctioned the private banking institution with owning all public debt (thereby effectively owning all private assets). In other words, BY LAW the Banks will own the Govt, which owns the people and all their assets. Hello NWO.
What I do not understand:
When someone unable to make even minumum payments on it's debt obligations without borrowing money from somewhere else (other credit venues) - is considered bankrupt.
What is different with USA Corp?
They came up with concept of sovereign debt. They believe they can use their self-given monopoly on force to commit armed robbery on the citizenry or to "Cypress" [nationalize] bank accounts or retirement accounts if they need cash. Bitterly cling to your 401K........
DISP is definitely the way to go from here : have Treasury issue bonds to cover for intra-governemental debt. Many more TSYs in the wild to satisfy dealers, a semblance of discipline for the govt (no debt ceiling hike for the moment), just the govt that takes the social security revenues while letting the market fund the benefits. Even if it is completely insane, at least it can provide stuff for the Fed to buy and for the banks to flip.
The prez refuses to do anything piecemeal, so if we can't pay all of the debt, we will pay none of it.
HR 804 directs the Treasury to pay interest on all debt first -- which would clear the default fear mongering. The Senate will not put HR804 to a vote. They all like fear mongering -- it is how they keep themselves in the public eye.
Bottom-line -- Lew is not going to default on debt payments. There is plenty of revenue to service debt.
They could always, you know, print dolla' billz yo. They do have this thing called a printing press.
What happens when they control all health care and have to default?
At this point China is determining our debt ceiling, so why don't we just get rid of our statutory limit. China can implement a "traffic light system", sort of like our terror alerts.
Red light= No debt issued today
Yellow Light =Debt issued, but implement some austerity
Green light = good to go.
Yerrow right? YOU LACIST!!!
WHAT WOULD GEITHNER DO ?
Look. Just raise the minimum wage to $17 trillion per hour. Bam! Problem solved. Sure, the resultant inflation would destroy your manufacturing industry - if you had one, and kill your export industry - if you had one, but you don't so it doesn't matter. But think of how much stuff the US consumer could afford to buy from the rest of the world including China! You'll lift the whole world out of recession! Imagine how awesomely grateful the rest of the world will be for your keen insight. I can see them now - waving their fists and tooting their horns in appreciation for the US customer once again saving them all. And think of the advantages of no debt! It'll be like 1913 all over again! You'll have, maybe if you're lucky, 100 years before the debt problem reappears but we'll be dead by then and it won't matter but if we're still alive then we can just increase the minimum wage again. Simple! Can I have my Nobel prize now?
To make the transition easier, and eliminate all them unnecessary zeroes, maybe you could print a new dollar, called the BOLLAR for Big dOLLAR, or the TROLLAR, for TRillion dOLLAR because 1 bollar = 1 trollar = 1 trillion dollars. Thus now we only have to increase the minimum wage from 7 dollars per hour to 17 trollars per hour. This is very similar to what some people want to do now anyway and so becomes simpler still!
Hmmm, a red arrow. Obviously I wasn't funny enough. Or maybe someone was worried that I was giving "them" ideas, or maybe "they" were worried that I was giving away the game plan. Don't worry guys, I'm not channelling the spirit of MDB. Honest!
Guys, we are in trouble. The fact this is even a possibility is absurd.
(might be off here). Any 'additional' extra measures to "save face" would result in immediate sell-off of bonds etc. the so-called 'pick-and-choose-payment' option is obviously flawed, then again, a "let's wait for a day or two until we have enough cash-strategy" will send a zombie-message to the markets.. i.e. default.
Plus the 'Platinum coinage' stuff (I smell Krugman from MILES away) will definitely say to the world : yes, but yes of course good Sir, we ARE a Banana-Republic...just that we are more heavily armed...
So is Russia.
Prioritization Of Payments: Would They? Could They?
On exactly that topic:
U.S. Default Will Never Happen: David Stockman
http://www.youtube.com/watch?v=HPXyu6QO-wA
It's all just political BS games as usual and the Republicans should stand fast.