What Happens When the US Government Runs Out of Money?

 

The federal debt reached the legal maximum of $14.3 trillion today and the US federal government says it will not run out of money to pay its bills. When the current limit is reached on May 16, after the Treasury completes its latest round of borrowing, the government will need to find $125 billion a month to pay its bills.

The government plans to borrow $405 billion during the second half of 2011. If rates rose even a tenth of a percentage point, the added cost on those borrowings would be $405 million a year.

 

The federal debt reached the legal maximum of $14.3 trillion today and the US federal government says it will not run out of money to pay its bills. When the current limit is reached on May 16, after the Treasury completes its latest round of borrowing, the government will need to find $125 billion a month to pay its bills.

The government plans to borrow $405 billion during the second half of 2011. If rates rose even a tenth of a percentage point, the added cost on those borrowings would be $405 million a year.

Many Republicans dismiss these warnings. They argue that the government could maintain the confidence of investors by prioritizing interest payments. The Treasury estimates that it can avoid a crisis until early August with few if any lasting consequences by spending about $100 billion in cash that it keeps on deposit with the Federal Reserve, the nation’s central bank, and by temporarily suspending $232 billion in special-purpose borrowing programs so it can instead borrow money to finance general operations.

Treasury Secretary Timothy Geithner says the threat of default is very real – while Republicans like Senator Patrick Toomey say the prospect of default is overstated. “A broad range of government payments would have to be stopped, limited or delayed, including military salaries and retirement benefits, Social Security and Medicare payments, interest on the debt, unemployment benefits and tax refunds,” Senator Toomey wrote.

The debt limited failed to achieve its purpose of limiting government spending which rose from 18.2 percent in 2000 to 24.1 percent this year. Nor has it helped to keep national debt in check; from a low of 56.6 percent of GDP in 2000 rising to 93.3 percent last year.

The Treasury Department pressed Congress to lift the borrowing limit; the government might be able to delay a crisis, perhaps even for a few months, through extraordinary measures such as asset sales. In a report by the NY Times:

[quote]with every passing week of stalemate over the debt ceiling, the risk increases that investors will start to fret that the United States will not pay its debts, and demand higher interest rates for loans to the federal government.

Should that happen, the cost could be vast and the damage difficult to reverse.[/quote]

Debates over the debt ceiling are a regular feature of political life in Washington. Congress has lifted the ceiling more than once a year, on average, over the last half-century — often right before the deadline. But the debt has never been so large, and the political climate has rarely been as contentious.

Republicans and some Democrats insist that an increase in the debt ceiling must be accompanied by concrete limits on future spending, entangling an issue that requires urgent attention with a debate unlikely to be resolved before the 2012 elections.

[quote]Mary Miller, assistant Treasury secretary for financial markets commented: “When I talk to investors, their general reaction is they’ve seen this movie before. They expect that Congress will increase the debt ceiling,”

“But I’m concerned because the stakes are higher here and the amount of time we can buy with extraordinary measures is smaller.”[/quote]

A range of experts, including the Federal Reserve chairman, Ben S. Bernanke; former Treasury officials from both political parties; and economists from across the ideological spectrum, warn that missing payments would be catastrophic.

Treasury officials respond that the failure to pay any obligations would set off a crisis.

Then the government could stave off default for a time by selling assets at fire sale prices. [quote]The United States owns about $402 billion in gold at Monday’s prices and about $81 billion in oil. It holds a portfolio of loans estimated to total $923 billion by September, including more than $100 billion in mortgage-backed securities it is selling slowly to investors, and more than $400 billion in college student loans.[/quote]

 

 

Infographic by Mint.com

Administration officials, however, say such a move would amount to a modest grace period bought at extravagant and wasteful expense. It would not change the fundamental need for Congress to raise the debt ceiling.

Congress immediately passed special legislation permitting the government to borrow the necessary money without counting it against the debt ceiling for one month. One day shy of a month later, Congress permanently raised the ceiling.

So is it really possible for the US Government to run out of money?

Forbes reported:

Not surprisingly, whenever the country approaches the debt limit, it turns into a partisan game of chicken–the party in power always wants to raise the debt limit immediately and unconditionally to make its life easier.  For example in 2004, one of six times during his presidency when President Bush asked Congress to raise the debt ceiling, then Treasury Secretary John Snow said, “Given current projects, it is imperative that the Congress take action to increase the debt limit.”

Two years later when President Bush asked Congress to raise the debt limit again, Senator Barrack Obama voted against doing so, saying:

“The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies…Increasing America’s debt weakens us domestically and internationally.”

Today, President Barack Obama says the sky will fall, interest will not be paid on the national debt and Social Security checks will not go out if Congress refuses to raise the debt limit.

Is the US headed for another catastrophic debt crisis?