Debt Ceiling Debate Begins Now
Add another new challenge facing Congress on January 1st, 2012.
Yesterday, Treasury Secretary Tim Geithner sent Congressional leaders official notification that the debt ceiling limit will be reached on December 31st. After that time, the Treasury will use “extraordinary measures” to keep the federal government running in emergency mode.
It rings the fight bell to begin yet another debt ceiling debate.
Official details on Treasury’s January 1st actions are found here:
“Secretary Geithner Sends Debt Limit Letter to Congress“
– Treasury Secretary Tim Geithner, Letter to Congressional Leaders, 12/26/2012
“Description of the Extraordinary Measures“
– Congressional Letter Appendix, 12/26/2012
They contain interesting revelations worth thinking about.
Déjà Vu All Over Again
That was 17 months ago.
The $2.1 trillion is now spent and more is needed.
As part of the August 2011 agreement, Congress authorized $1.2 trillion in spending cuts to partially offset the cost of the newly authorized debt.
Ironically, those spending cuts, called sequestration, are slated to start on January 1st, 2012. The money got spent before the government even started paying for it!
Debt debates are beginning to merge into one big blur while federal debt growth mounts.
The good news is that if we plunge over the fiscal cliff and stay there then the federal government can last longer without default. The bad news is that GDP will decline into recession and overall federal revenues will thus decline. It is the catch-22 of raising taxes and spending cuts.
2012 “Extraordinary Measures” Explained
According to the letter, Secretary Geithner has about $200 billion he can scarf up to fund government for a couple months or so. How long can’t be determined because it depends on, as yet, undecided fiscal cliff changes.
Explained in the letter appendix…
$156 billion of the $200 billion of “extraordinary measures” will come from the “G Fund”. The other $44 billion comes from several other nooks and crannies hidden within the federal government, but don’t amount to enough to matter.
The G-fund is the “Government Securities Investment Fund (G Fund) of the Federal Employees’ Retirement System Thrift Savings Plan”. It is a federal worker pension and savings trust fund managed by the government.
As always happens, draining the retirement and thrift savings trust becomes the primary source for funding government operations during fiscal emergencies. The fund is immediately reimbursed as the first order of business after a new, higher debt limit is set.
The appendix discusses the option of selling federal assets to fund the government. That approach is rejected. Geithner’s reasons, however, draw attention.
On selling gold from Ft. Knox:
Selling the Nation’s gold to meet payment obligations would undercut confidence in the United States both here and abroad, and would be extremely destabilizing to the world financial system
Why couldn’t Ft. Knox simply be reimbursed like the G-fund is? Is there a deeper reason behind it? Perhaps, the federal government doesn’t hold much in gold reserves anymore.
As of November 17, 2011 the Federal Reserve reported the United States had $2.15 trillion in dollars in circulation. The money supply had went up 28% in just two years. We’ve been off the gold standard for decades so we probably only have a small fraction of that amount in gold reserves now.
During the financial crisis of 2008-2009 the U.S. Treasury bought up a large number of assets in TARP debt deals to help save the financial system. Among other things, they included mortgage-backed securities, GM stock, AIG stock and homeowner loans.
Regarding those assets:
Treasury has already sold most of these assets and is conducting an orderly wind-down of the remaining investments. A fire sale of these assets, however, would be disruptive and would harm taxpayer interests. Similar considerations argue against fire sales of other public assets.
The most meaningful statement of all from Geithner is this:
In any event, asset sales would not generate sufficient revenue to make an appreciable difference in when the debt limit must be raised
This last statement cuts to the chase… the federal government doesn’t have enough in salable assets to buy candy bars!!
Playing politics has left the U.S. facing another debt limit debate, the fiscal cliff, a bad economy and long-term unsustainable debt growth. The list keeps getting longer.
It often is said that the debt ceiling is outmoded and should be abolished. We don’t have a debt or spending problem, Keynesian macroeconomists say. All it does, they tell us, is create unwarranted uncertainty and division when it is totally meaningless.
Yet here we are again, right back where we were less than a year and a half ago. The mess is bigger now and more complicated than it has ever been before.
Does the federal government need to invest to revive the economy? Absolutely!! Like any other business, ya gotta spend money to make money!
Governments have fancy monetary tools, like quantitative easing, that normal businesses do not have. They are good tools. However, like any business, a government still has got to pay attention to its bottom line. The debt ceiling limit is how the United States watches the bottom line.
Stop watching it and the federal government just might go out of business.