Hard truths about the debt ceiling and uncertainty in the Treasury market


Two organizations provide information to Congress in an unbiased manner, with great care for accuracy and completeness of information:  The Congressional Research Service (CRS), an arm of the Library of Congress, and the General Accountability Office (GAO), formerly the General Accounting Office.  Both agencies share the unique status of being organs of the Congress, and not the executive branch.

Consequently, we and Congress should give particular consideration to a report issued by GAO on February 22, 2011:

Debt Limit: Delays Create Debt Management Challenges and Increase Uncertainty in the Treasury Market

GAO-11-203 February 22, 2011
Highlights Page (PDF)   Full Report (PDF, 52 pages)   Accessible Text   Recommendations (HTML)

Summary

GAO has prepared this report to assist Congress in identifying and addressing debt management challenges. Since 1995, the statutory debt limit has been increased 12 times to its current level of $14.294 trillion. The Department of the Treasury (Treasury) recently notified Congress that the current debt limit could be reached as early as April 5, 2011, and the Congressional Budget Office (CBO) projects that under current law debt subject to the limit will exceed $25 trillion in 2021. This report (1) describes the actions that Treasury traditionally takes to manage debt near the limit, (2) analyzes the effects that approaching the debt limit has had on the market for Treasury securities, and (3) describes alternative mechanisms that would permit consideration of the link between policy decisions and the effect on debt when or before decisions are made. GAO analyzed Treasury and market data; interviewed Treasury officials, budget and legislative experts, and market participants; and reviewed practices in selected countries.

The debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a limit on the ability to pay obligations already incurred. While debates surrounding the debt limit may raise awareness about the federal government’s current debt trajectory and may also provide Congress with an opportunity to debate the fiscal policy decisions driving that trajectory, the ability to have an immediate effect on debt levels is limited. This is because the debt reflects previously enacted tax and spending policies. Delays in raising the debt limit create debt and cash management challenges for the Treasury, and these challenges have been exacerbated in recent years by a large growth in debt. In the past, Treasury has often used extraordinary actions, such as suspending investments or temporarily disinvesting securities held in federal employee retirement funds, to remain under the statutory limit. However, the extraordinary actions available to the Treasury have not kept pace with the growth in borrowing needs. For example, unlike the past, the amount potentially provided by the extraordinary actions for 1 month in fiscal year 2010 was less than the monthly increase in debt subject to the limit for most months of the year. As a result, once debt reaches the limit, Congress will likely have less time than in prior years to debate raising the debt limit before there are disruptions to government programs and services. This trend is likely to continue given the long-term fiscal outlook. Failure to raise the debt limit in a timely manner could have serious negative consequences for the Treasury market and increase borrowing costs. Also, some of the actions that Treasury has taken to manage the amount of debt near the limit add uncertainty to the Treasury market. In the past, Treasury has postponed auctions and dramatically reduced the amount of bills outstanding, which compromised the regularity of auctions and the certainty of supply on which Treasury relies to achieve the lowest borrowing cost over time. GAO’s analysis suggests that borrowing costs modestly increased during debt limit debates in 2002, 2003, and most recently in 2010. In addition, managing debt near the debt limit diverts Treasury’s limited resources away from other cash and debt management issues at a time when Treasury already faces challenges in lengthening the average maturity of its debt portfolio. Observers and participants suggested improving the link between the spending and revenue decisions that drive debt and changes in the debt limit. Better alignment could be possible if decisions about the debt level occur in conjunction with spending and revenue decisions as opposed to the after-the-fact approach now used. This practice, which is similar to practices used in some other countries, might facilitate efforts to change the fiscal path by highlighting the implications of tax and spending decisions on changes in debt. To avoid potential disruptions to Treasury markets and help inform fiscal policy decisions in a timely way, Congress should consider ways to better link decisions about the debt limit with decisions about spending and revenue. Treasury provided technical comments on a draft of this report, which GAO incorporated as appropriate.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from “In process” to “Open,” “Closed – implemented,” or “Closed – not implemented” based on our follow up work.

*     *     *     *     *     *     *

Matters for Congressional Consideration

Recommendation: The projections of a growing debt burden have raised concerns both in Congress and in the public. Well-designed budget processes and metrics can help as Congress and the President seek to address the federal government’s long-term fiscal challenge. The current design of the debt limit does not engender or facilitate debate over specific tax or spending proposals and their effect on debt. In addition, the uncertainty it creates can lead to disruptions in the Treasury market and in turn to higher borrowing costs. To avoid these potential disruptions to the Treasury market and to help inform the fiscal policy debate in a timely way, Congress may wish to consider ways to better link decisions about the debt limit with decisions about spending and revenue. Such a process would build on the approach used in 2008 and 2009 when Congress passed and the President signed three laws that were expected to increase borrowing with a corresponding increase in the debt limit. This report presents a number of approaches that could serve as a basis for better linking decisions about spending and revenue with decisions about the debt limit.

Status: In process

Comments: When we determine what steps the Congress has taken, we will provide updated information.

Use the links near the top of the report to get to the full report.

Pay particular attention to this, repeated from above:

The debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a limit on the ability to pay obligations already incurred. While debates surrounding the debt limit may raise awareness about the federal government’s current debt trajectory and may also provide Congress with an opportunity to debate the fiscal policy decisions driving that trajectory, the ability to have an immediate effect on debt levels is limited. This is because the debt reflects previously enacted tax and spending policies. Delays in raising the debt limit create debt and cash management challenges for the Treasury, and these challenges have been exacerbated in recent years by a large growth in debt.

Tip of the old scrub brush to Michael A. Ryder.

_____________

Wall of shame:  Bloggers and others who do not have a clue

14 Responses to Hard truths about the debt ceiling and uncertainty in the Treasury market

  1. James Hanley says:

    Morgan,

    That you would say it’s “factual” information when someone claims the Republicans are negotiating seriously and the President isn’t–when in fact the President has so far made so many concessions that his current proposal is even to the right of most Republicans (see here), while the Republicans refuse to accept any revenue increases at all, of any kind, does not reflect well on your capacity for serious analytical thought.

    And to argue that the issue of expanding our long-standing government health care plan is more important than the issue of whether the U.S. fails to meet its credit obligations and becomes a defaulter for the first time in hits history does in fact show that you lack a sense of proportion. Perhaps you might like to review the meaning of that word.

    Like

  2. …and that, James, takes us right back to my original comment, does it not? We would have catastrophic results from not being able to service our debts (which actually is a myth…you need to go back and look at that link I posted, and read it, rather than spewing…you’re demonstrating you either didn’t read it or can’t comprehend simple double-entry bookkeeping).

    My original comment: We can’t afford ObamaCare. We actually can’t afford lots of stuff — much of which we took out in the last 2 or 3 years, on the installment plan. Really, when you’re servicing your debts with borrowed money already, it’s not a good move to go buying a bunch of new stuff, right? That’s the way it works for people. I don’t see why our government is any different.

    How’d you like it if you had an uncle who bought a new Porsche even though he was already servicing the debts he had, with borrowed money? Gather around, let’s help Uncle Marty…he’s got a perfect payment record, and may lose it which would be catastrophic. Or no wait, maybe let’s make it an Uncle Ed, who’s got all kinds of cherry-picked “facts” that show the Porsche is actually an investment. Yeah, we’ve got to loan money to our uncle who hasn’t had to live within his means, ever, like the rest of us have — because when he can’t service his debts, it’s somehow everyone else’s fault.

    How’d you like it if this uncle of yours was a Republican? Bought a big expensive new toy he’s just sure will pay for itself…but that takes care of his existing debt limit and now he’s in real trouble. Gather around, help him out.

    So yes. It leads to a crisis. Trouble is, we’re headed there already. The debt limit has much less to do with it than the democrat party is trying to make people think.

    Now, a question for you: By raising this debt limit, do we get out of this trouble? How so? It really boils down to that, don’t you think? So what’s the answer?

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  3. James Kessler says:

    Watch this, Ed, he’s going to attack the US Chamber of Commerce of being “liberal.”

    Morgan, when even the organization that bought your party the House 10 months ago is going “What the **** do you guys think you’re doing?” you and yours should probably very strongly consider the fact that your position is one of those positions that only lunatics hold.

    If I was the President and your party managed to get a vote to not raise the debt ceiling and the economy crashed because of it like every economist is warning will happen..every member of your party who voted that way would be rounded up and charged with treason. Not because they disagreed with me…but because your party then knowingly and intentionally caused catastrophic harm to the country and to the people of this country.

    If you’re wrong the consequences will be catastrophic.

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  4. James Kessler says:

    Morgan, I have a simple question for you.

    What if you’re wrong? What if we don’t raise the debt ceiling and the absolute worst happens..the economy completely crashes, the United States defaults and the world economy crashes? Because if that happens, Morgan, it will make the Great Depression look like a walk in the park.

    What then?

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  5. Ed Darrell says:

    The time has come to review some facts that weren’t cherry-picked by Ed Darrell.

    That comment highlights the root of prevarication which unfortunately pervades the modern, so-called conservative movement. In the post, I highlight the 52-page, facts-only, straight-up report by the General Accountability Office, an agency of Congress which by law and by long practice remains unbiased in its reporting on policy issues to Congress.

    In other words, just the facts, ma’am — the facts, all the essential facts. The truth, the whole truth, and nothing but the truth.

    Morgan calls it “cherry picking.”

    Morgan’s statement is divorced from reality. That we cannot get conservatives to agree that facts are what they are, is a real nation-stopper in politics today.

    The nation being stymied is the United States.

    As is usually the case, they change pretty much everything.

    Ed, it occurs to me a good definition of an extremist might be: One who says anyone who takes a position different from mine, is automatically a fool, or a bigot, or doesn’t know what he’s talking about…in fact, as we saw from the O.J. trial, it’s perfectly possible for reasonable, mature adults to review a common set of facts and competently come to different conclusions about things.

    Pick something from the GAO report which you claim is in error. Don’t try smearing the report by analogizing it to the O. J. Simpson case — this is not that case.

    If there is factual error, show us.

    If you do not, or cannot, show us, you cannot make such a claim. You cannot cherry pick by wild not-even-tangential analogy.

    If you draw a different conclusion from that of GAO at any point, tell us why. Don’t call a paragon of non-bias wrong in their reporting of the facts — show us the error.

    You don’t seem to get this. I have some pretty harsh words for liberals, but my target is selected — I set my sites on the extremists, the ones who seem to say “anyone to the political right of Al Gore must be a fool.” You, on the other hand, seem to be casting a dangerously wide net. Seriously, I see it in post after post after post…here is the conclusion, everyone who thinks differently is an imbecile.

    Your rash labeling of the GAO report exposes your claims as not what you present them to be. These are the facts. Why should someone who dismisses them not be labeled as a fool? The report says up is up, down is down, white is white, black is black, red is red. You call it wrong, and claim the right to make that statement.

    Well, yes, you have that right. By exercising that right without demonstrating GAO’s error, however, you open yourself to a fair labeling as acting the fool. The Fool in antiquity was the guy who provided levity, sometimes with parody, sometimes with just silliness, but not expected to be taken seriously.

    Do you expect to be taken seriously, Morgan?

    Show us where GAO errs.

    And if they don’t err, if the debt ceiling functions as it does, and if the consequences of failing to timely raise the debt ceiling are exaclty as the GAO says, then anyone playing chicken with the debt ceiling is a fool or an anti-patriotic saboteur. It is no exaggeration to note that Nikita Khrushchev and Osama bin Laden worked tirelessly to smash America’s credit rating exactly as failing to raise the debt ceiling would do. With friends like the Tea Party and their lapdog, lackey Republicans, who needs al Quaida?

    What the Tea Party proposes is a blow at the western world worthy of SMERSH, or Auric Goldfinger. It should be movie fiction, not what grownups do after taking an oath to uphold and defend the Constitution.

    I don’t think you’re objecting that “fool” is not a strong enough term, are you? You’d have a case there.

    I cast a very narrow net. It’s not even a net — it’s a stiletto. It is aimed only at those who propose to urinate on the U.S. flag, Declaration of Independence and Constitution, and who work hard to repudiate the work and legacy of Alexander Hamilton and George Washington, and James Madison and Theodore and Franklin Roosevelt, in building a nation whose word is its bond, whose loyalties are sought after like gold, who stands up when the chips are down.

    Reputation is a terrible thing to lose, to nobly paraphrase Dan Quayle.

    Ever read Shakespeare? “Who steals my purse, steals trash, but he that filches from me my good name robs me of that which not enriches him and makes me poor indeed.”*

    Not raising the debt ceiling steals both our purse and our name. Even the threat of such action may have crippled our credit rating and will cost us hundreds of billions of dollars — for cheap political theatre?

    It’s a tragedy of Shakespearean proportion. Calling the tragedy’s agents “fools” is gentle indeed.

    _____________
    * Othello, Act III, Scene iii [from Iago, perhaps ironically; even the bad guy in the play understands why raising the debt ceiling should be a no-brainer]

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  6. The time has come to review some facts that weren’t cherry-picked by Ed Darrell.

    As is usually the case, they change pretty much everything.

    Ed, it occurs to me a good definition of an extremist might be: One who says anyone who takes a position different from mine, is automatically a fool, or a bigot, or doesn’t know what he’s talking about…in fact, as we saw from the O.J. trial, it’s perfectly possible for reasonable, mature adults to review a common set of facts and competently come to different conclusions about things.

    You don’t seem to get this. I have some pretty harsh words for liberals, but my target is selected — I set my sites on the extremists, the ones who seem to say “anyone to the political right of Al Gore must be a fool.” You, on the other hand, seem to be casting a dangerously wide net. Seriously, I see it in post after post after post…here is the conclusion, everyone who thinks differently is an imbecile.

    Like

  7. Ed Darrell says:

    Uh, yeah, and because I have a sense of proportion I’ve got some idea how much more the government’s spending than it spent previously; I also have a sense of how much it’s managed to collect.

    Go look ‘em up, kiddo. There’s some irony involved in your question there and you need to learn where it is.

    This is why I think you’re a fool sometimes, Morgan –not an idiot, but an intentional fool.

    Debt ceiling isn’t about future spending. It’s not about deficits. It’s about the money required to fight the wars, the money we’ve already spent.

    The question is simple: Will the nation honorably honor the promises it has made, and pay for the goods and services it has used, or will the nation race to become a bigger Greece? Will the nation try to walk out on the bill, stiffing the waitress?

    You claim to choose the latter path. Only the foolish, or criminal, would do so.

    One of the reasons I used to like working at American Airlines was the sense of honor that pervaded most dealings. We had an army of lawyers to sue the hell out of anybody who stiffed us on a bill. With millions on the line, delaying payment for a day, or two, could mean millions in profit over the course of a year. I well remember one day in a meeting where some finance department whiz had determined that we could add something like $20 million to the bottom line of the company if we just delayed payments to airports and the FAA and other landlords by two days a month, instead of paying on time.

    The response was beautiful. Some lower-level manager asked the guy what he thought we would have done to anyone who stiffed us just two days a month. That was the only question. The proposal didn’t even get discussion.

    Why would we stiff the men and women who fight in Iraq and Afghanistan, Morgan? Why would we stiff anyone who collects a Social Security check? Why would we stiff Lockheed Aircraft, or the company who builds Humvees? Why would we stiff anyone?

    Why would anyone even entertain the notion of peeing on the honor of this nation like that?

    We have the money, or the means to borrow it. Failing to borrow the money to be sure the checks don’t bounce is dishonorable in this case. Failing to borrow the money to pay the bills will increase deficits with nothing in return. It will handcuff our nation in its ability to fight wars.

    Can you imagine how the nation’s enemies are rubbing their hands in eager anticipation?

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  8. Have you no sense of proportion?

    Uh, yeah, and because I have a sense of proportion I’ve got some idea how much more the government’s spending than it spent previously; I also have a sense of how much it’s managed to collect.

    Go look ’em up, kiddo. There’s some irony involved in your question there and you need to learn where it is.

    Like

  9. James Hanley says:

    Amen, Ed. I am beyond astonished that these right-wing fools are willing to risk the credit-worthiness of the United States over disagreements about the proper mix of taxing and spending. The U.S. has never, in its entire history, defaulted on its debts, and if these narrow-minded dolts cause us to do it for the first time ever they will go down in history as some of the most harmful congressmen ever. It’s inconceivable, to anyone with a reasonable grasp of history to think that anything but fierce vituperation will ever be attached to their names. For people who claim to be patriotic they are shockingly willing to do serious harm to their country.

    @Morgan K Freeberg: I oppose the Obama health care policy, too, but that is not the issue here. How astoundingly small-minded are you to focus on that when U.S. securities are on the verge of being downgraded? Have you no sense of proportion? Have you no understanding of where the real harm to our country lies?

    Like

  10. Ed Darrell says:

    John: But the federal government is not the state governments — the federal government was not created by the states, but by a compact between the citizens.

    This separation of powers between the states and the federal government has been very clear, for all I know, since 1789. Do you understand it differently? Have you read the entire GAO report — is it in error, do you claim?

    Like

  11. James Kessler says:

    Morgan writes:
    Yeah, that ObamaCare thing is gonna have to go, looks like.

    That coming from the jackass who can’t get it through his head to give up Bush’s tax cuts.

    Morgan, get this through your head. “Obamacare” hasn’t even been implemented yet. It hasn’t increased costs and the CBO says it wont. So why should we believe you and your ignorance?

    Let me buy you another clue. The CBO has also said that if we got rid of Bush’s tax cuts..the deficit would be nonexistant in 7 years.

    But no..there you sit..wanting to subject the people of this country to being raped, pillaged and killed by the health insurance industry while 10% of the population continue to increase their current 84% ownership of the wealth of this country.

    You are the very definition, Morgan, of Nero fiddling while Rome is burning.

    I can hardly wait until you and yours are royally ****** over by your stupid and blind obedience to the right wing. I can hardly wait for the day, Morgan, that you find yourself so screwed over by those you’re seeking to protect at all costs that you finally realize what a stupid idiot you’ve been.

    Like

  12. john says:

    The constitution was clear. and yet they found a way to manipulate it, the greatest legal loophole in history http://bit.ly/qyl7H2
    federal government= all the states and this section in the Constitution applies to it to.

    Like

  13. Ed Darrell says:

    Obama’s health care reform is projected to reduce deficits. Classic conservative denialism: “Stop taking the medicine because it’s expensive, even though the funeral will cost more.”

    Like

  14. …and these challenges have been exacerbated in recent years by a large growth in debt.

    Yeah, that ObamaCare thing is gonna have to go, looks like.

    Like

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