Is Jack Lew fudging debt ceiling timing?

U.S. Treasury Secretary Jack Lew

In a speech at the Bipartisan Policy Center Monday, U.S. Treasury Secretary Jack Lew said the federal government will have to begin “extraordinary measures” on Friday, Feb. 7th 2014 to avoid defaulting on this country’s massive $17.2 trillion dollar national debt.

Yup! That’s right! Another debt ceiling debate may begin.

This time, though, Secretary Lew says the situation is so desperate the government will have to start defaulting its debt by the end of this month!

Is this true? Or, fresh off a business-as-usual budget deal in January, is Lew playing partisan politics to pressure Congress into giving President Obama a pass, without preconditions, on raising the debt ceiling limit?

The evidence indicates that Secretary Lew is cooking the books.

Anatomy of a debt ceiling debate

It’s all about the national debt. The scenario is always the same…

The Treasury Secretary warns there will be economic calamity if the debt ceiling is not raised immediately. He then begins “extraordinary measures” to prevent that from happening. The Congress argues and grandstands and drags its feet over fiscal reform until literally the 11th hour before the threatened defaults are scheduled to begin.

Then someone caves over this or that and Congress finally grants the federal government spending authority to continue blowing $2-3 billion/day it doesn’t have again.

“Extraordinary measures” means spending literally every dime that the American people are foolish enough to allow the federal government to manage that isn’t already spent. That amounts to several hundred billion dollars. Chief among those funds are federal pension plans.

It would be more than a few hundred billion, except every last penny in the Social Security and Medicare trust funds are already gone. Those monies are spent during normal day-to-day operations.

In the end, money borrowed during the “extraordinary measures” phase are the first paid back after a deal is reached.

Recent debt ceiling debates

There have been three debt ceiling debates since 2010.

The first contentious one started in May 2011, lasted two and a half months and resulted in a downgrade in the credit rating of the United States. In the end $235 billion dollars had to be paid back to cover the cost of “extraordinary measures”.

The second one started on New Year’s Day in 2013. It was settled quickly, on Feb. 4th 2013, lasting just five weeks. Only $47 billion had to be paid back to cover “extraordinary measures” costs.

The third debate began in late May 2013 and lasted a long four and a half months. When paid back in mid-October, the “extraordinary measures” cost a whooping $340 billion dollars. That repayment put the national debt over $17 trillion for the first time ever.

It took three debt ceiling debates for the government to exercise a tiny fractional restraint in its spending to the tune of $45 billion last year against $3.8 trillion spending.

To hear the President whine about a 1.1 percent sequestration cutback you’d think it was the end of the world as we know it. To emphasize his point he ordered the shutdown of White House tours to school groups and to ordinary Americans who pay all the bills.

Since the first debt ceiling debate in 2011 the national debt has grown $3 trillion dollars! That’s a 17.4 percent growth in two and a half years.

In other words, there hasn’t been any restraints put on federal spending whatsoever after three showdowns.

Now, once again, we face another debt debate because the problem has not been fixed.

The errors in Secretary Lew’s reasoning

The Treasury Department will have to start using extraordinary measures so the government can continue to meet  its obligations.
– Treasury Secretary Jack Lew, Bipartisan Policy Center, 2/3/2014

In his remarks at the Bipartisan Policy Center, Lew said, “We now forecast that we are likely to exhaust these measures by the end of this month.”

Secretary Lew suggests the primary reason is that Treasury will be sending out tax refunds that will quickly drain funds.

To check the voracity of Lew’s claim look back at the 2nd debt debate a year ago January. In that one the debt ceiling was reached on Jan. 1st 2013, the very day that Treasury pays out first quarter interest on Treasury bonds. The quarterly interest payments are around $100 billion.

Despite the quarterly balloon payment, the federal government still lived off extraordinary measures for five weeks and only burned through about $47 billion. That is a far cry less than the $340 billion it accumulated later in 2013 during the third debt debate.

An important difference this year from last is that the national debt has went down $58 billion since the start of the year and there will not be another huge quarterly interest payout until the end of March.

Over the last six years, since the start of the Great Recession, the national debt has averaged about $177 billion in February debt growth, presumably to pay for early tax returns as Lew suggests.

Conclusions

Since May 2011 the national debt has grown $3 trillion dollars! That’s a 17.4 percent growth in under three years.

It’s obvious from reviewing the last three debt debates that the federal government can last longer in emergency mode than Jack Lew lets on. He is right that expenditures are higher at the beginning of the year than later on, but the lesson of the second debt debate is that the federal government will be able to last a lot longer than the end of this month.

That is not to say we should degenerate into another contentious debate that lowers the government’s credit rating again. We shouldn’t.

What this nation desperately needs to do is seriously face up to it’s growing debt and take positive steps to slow it down. In the meantime the Congress will have to raise the debt ceiling yet again. It’s unavoidable.

The national debt has doubled since historically low yields on Treasury bonds have been in place. But interest paid on Treasury bonds have doubled in the last two years and will continue to go up as the economy improves and the Fed tapers QE.

If this government continues business as usual then growing interest costs on the national debt will soon double from $400 billion/yr to $800 billion/yr and then to over $1 trillion/yr. It’ll grow to the point that it becomes the single largest expenditure in the federal budget.

Should that happen, economic calamity really will be on our doorstep.

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