As middle market businesses weigh the costs of the stand-off over raising the nation’s debt ceiling, we offer some answers to frequently asked questions about how the dispute will play out.
What is the debt ceiling?
The debt ceiling sets a limit on how much debt the U.S. government can incur. It dates to 1917 during World War I and was refined during the 1930’s—two periods of elevated federal government expenditures.
When will the government enter default?
In January, the U.S. government exceeded the $31.4 trillion debt limit set by Congress, kicking off a series of moves by the Treasury, called extraordinary measures, to fulfill the government’s obligations.
At some point, though, the Treasury will exhaust what it can do, and, without a debt limit increase, the government will enter default.
When that happens depends upon the flow of revenues into the U.S. Treasury.
The Congressional Budget Office said in February that the date of an actual default would fall sometime between July and September.
What are extraordinary measures?
The Treasury has two effective means to stave off default: Cash on hand at its Federal Reserve account, which was approximately $455 billion near the end of January, and financial maneuvers known as extraordinary measures.
About 24% of total debt is in nonmarketable securities, mostly comprised of the so-called government account series for federal pensions and other agency holdings. The Treasury temporarily withholds payments into these funds to postpone the so-called X-date when default on marketable securities begins.
Is there any way out of this stand-off?
One challenge to the current round of policy brinksmanship is the lack of viable options to defuse the stand-off. The following is a quick synopsis of options that could avert a crisis.
- Discharge petition: One potential solution would be through Congress where a simple majority, without support of the leadership, brings a bill for lifting the debt ceiling to a vote on the floor. It is not clear that the members of the GOP, the majority in the House, is willing to defy its leadership to use such a procedure. In addition, such action can be quite time consuming and would be ill-suited to a last-minute solution.
- Prioritization: There are various plans circulating to prioritize Treasury payments to avoid a default. Both parties have studied such an approach that involves picking winners and losers during an extended standoff. The idea that the U.S. government would choose to pay foreign holders of debt or large financial firms—the five largest private sector holders of public debt own about 5% of total debt worth $1.2 trillion, according to Bloomberg—over Social Security, Medicare and Medicaid recipients strikes us as fanciful at best.
- Platinum coin: One of the odd talking points around the debt ceiling debate involves the Treasury minting a trillion-dollar coin and depositing it into its account at the Federal Reserve. Because of a quirk in the law, the face value of coins minted by the Treasury is not limited. We doubt this would survive legal much less political scrutiny and is a general nonstarter as a viable solution.
- Fourteenth Amendment: The “validity of the public debt of the United States … shall not be questioned” is part of the 14th Amendment to the Constitution. One interpretation of this is that nonpayment of public debt is not constitutional. Since this has little jurisprudence around it and the prevailing legal interpretation is divided, we do not expect much political capital to be used on this option in the runup to the more intense phase of this crisis through midyear.