As is well known, on May 19 the US hit its debt limit at which point the Treasury began tapping into emergency borrowing authority – the "extraordinary measures" profiled here previously [11]– which gave Jack Lew breathing room to allow for an additional period of fully-funded government operations. The waterfall of measures available, shown below, is why so many have been confused why the US debt has been stuck at one number for the past 4 months even as the Treasury has continued to operate and fund day to day cash needs.
[12]
One reason why the US has been able to extend its true "drop dead" cash exhaustion date has been due to an increase in tax revenues due to the payroll tax cut as well as cash inflows from the GSEs (which are set to reverse and become outflows once the latest housing dead cat bounce reverses), and cash remittances from the Fed.
However, the capacity under this extended "revolver" is rapidly running out, and as of August 31, 2013, approximately $108 billion in extraordinary measures remained available for use. In a report released today [13], the Bipartisan Policy Center has released another analysis of just when the US will hit the "X Date" or the date on which the Treasury will not have sufficient cash to pay all of its bills in full and on time. Should there be still no deal on the debt ceiling by this date, the Treasury will be forced to prioritize payments to avoid a debt default. According to this estimate, the X Date falls anywhere between November 5 to as recently as October 18, or just over a month from now (and there has been zero real discussion in Congress over the debt ceiling hike with all the excitement over Syria).
[14]
According to the BPC, these are the key events in September and October as we head into yet another "X Date" showdown?
- Income Tax Payments Due Mid-September
- The expected revenue spike in mid-September is related to quarterly estimated tax payments, which are due on September 16, 2013.
- Military Retirement Benefit Accrual on October 1
- On the first day of the new fiscal year, the value of military retirement benefits (including pensions and healthcare) earned during the year by currently serving members of the military must be accrued.
- This will result in an approximately $75 billion increase in intragovernmental debt, which counts toward the debt limit.
Visually, here are the key funding requirements until the first X Date estimate:
[15]
Assuming there is still no deal by October 18, which with every passing day seems more probable, much more cash will be needed:
[16]
Naturally, for the US, and more importantly the dollar's reserve currency status, nothing could be more damaging than effectively becoming in default on payments, either internal obligations or interest and maturity payments. None other than Bernanke has opined on the matter: "[Going past the X Date] would no doubt have a very adverse effect very quickly on the recovery. I'm quite certain of that.”
Still, in a worst case scenario what happens?
Priotiziation, or selective payment of obligations.
It would be as follows:
- If we reach the X Date, Treasury might either prioritize payments or make full days’ worth of payments once they receive sufficient revenues to cover all of a day’s obligations.
- Interest on the federal debt would likely be prioritized in either scenario – it is paid on a separate computer system (FedWire).
- Scenario # 1: Pay some bills, but not others
- Treasury might attempt to prioritize some types of payments over others. Prioritized payments would be made on time, others would not.
- This option may not be possible to implement using Treasury’s current financial systems. It would involve sorting and choosing from nearly 100 million monthly payments.
If the X Date arrives on October 18 (the beginning of the BPC range):
- Treasury would be about $106 billion short of paying all bills owed between October 18 and November 15 (20 business days).
- Approximately 32% of the funds owed for the period would go unpaid.
- The reality would be chaotic:
– Unfair results, unanswered questions
– Treasury picking winners and losers
– Public uproar
– Intense global media focus
[17]
[18]
- Scenario # 2: Make all of each day’s payments together once enough cash is available
?Treasury might wait until enough revenue is deposited to cover an entire day’s payments, and then make all of those payments at once.
(For example, upon reaching the X date, it might take two days of revenue collections to raise enough cash to make all of the payments due on day one. Thus, the first day’s payments would be made one day late. This, of course, would delay the second day’s payments to a later day.)
?In the 2012 OIG report, some senior Treasury officials stated that they believed this to be the most plausible and least harmful course of action.
?Since debt operations are handled by a separate computer system, these payments could likely still be prioritized under this scenario.
But as always, the hard data is not the interesting part: what is most amusing as part of this periodic analysis released always just before the X Date is breached, is the Mutual Assured Destruction section, aka the "Market Risk", because in the new normal, where confidence is always and only the level of the Dow Jones Industrial Average (post removal of losers), all that matters is the market (and the USD reserve currency status but that is a different story).
We will let readers get to the punchlines on their own time.