Sailing Downriver, We Approach the Cataracts
Part 8 of a series
The U.S. political economy is in much the same place as it was one week ago. The Treasury Department has bumped up against the federal debt ceiling and is running low on cash to pay its bills. Treasury Secretary Janet Yellen has predicted that Monday, June 5, will be the "X-Date." The Republican majority in the House of Representatives has passed a bill raising the debt limit but also imposing cuts on Medicaid and other social welfare programs -- actions Democrats label as hostage-taking. President Biden, on the basis of his experiences in the Obama administration in 2011 and 2013, vowed not to negotiate with hostage-takers -- and is now fully engaged in such negotiations. Wall Street has not yet gone into panic mode, so those in Washington still have the luxury of posing and pontificating, at least for a few more days.
We're sailing down a river, pulled forward by a powerful current. That river may be the Niagara.
Can the United States Actually Run Out of Money?
A headline in the Washington Post caught my eye earlier this week: "The man in charge of knowing when the U.S. runs out of money". The article was a profile of the Treasury official whose job it is to actually manage the $185 billion daily flow of funds in and out of the Treasury and to sound the alarm when what is, in effect, the Treasury's checking account at the Federal Reserve runs dry. This is the situation which the article's headline describes as the "U.S. running out of money" -- and that is how the "X-Date" has been widely portrayed.
But how precise is that description? Can the United States government actually run out of money?
No, it cannot -- but it can itself up in knots such that it cannot replenish the accounts out of which it spends. To understand what that means, let's start by asking what would happen if the Treasury's account at the Federal Reserve actually was about to run dry but we were not in "bumping-up-against-the-debt-ceiling" crisis mode, but rather were in "normal" times.
Caution: What follows is not something for which I can provide footnotes or weblinks to U.S. Treasury operations manuals. I don't know all the operational details and welcome corrections from readers. Earlier this week I posted a question about this on the Modern Monetary Theory Google Group mailing list and what I write here is in part based on the responses I got there. So consider this an attempt at a narrative of what would happen rather than a description of what will happen.
Suppose the Treasury General Account (TGA) at the Federal Reserve was projected to have a balance tomorrow below the amount of bills, Social Security benefits, interest payments, etc., were scheduled to be paid tomorrow. Let's call the Treasury official monitoring that account "Dave", since the official profiled in the Post is named David Lebryk. What would Dave do when he saw where the TGA balance was headed?
Dave would presumably call up the Treasury official in charge of auctions of Treasury debt instruments and ask, "Can you schedule an auction of $30 billion of Treasury bills for tomorrow?" The second official -- let's call her "Susan" -- would say, "Dave, let me first check to see whether that would put us over the total amount of debt Congress has authorized us to carry." Susan would check and, in normal times, call Dave back and say, "No problem, Dave, we're well under the debt ceiling." She would then schedule the auction. Since (for a variety of reasons too long to explain here), those auctions are almost always oversubscribed, Susan's auction would bring in the $30 billion Dave needs need in the TGA and the U.S. would continue to meet all its payment commitments.
So, under "normal" circumstances, the particular U.S. government accounts from which payments are made can run low on money, but those particular accounts would never run out of money because there's a standard operating procedure to replenish them. The catch is that Susan's bureau at the Treasury needs Congressional authorization to conduct sales of debt instruments. Right now, that authorization has run out, so there is a significant risk that the flow of funds into that TGA will be insufficient to make scheduled payments from the TGA.
Note further that, from the point of view of Treasury officials Dave and Susan, the money in the TGA appears to come from somewhere outside the government via taxation or borrowing. Where that money was created is ... how shall we put it? ... unspecified. Where that money was created is not a question which either Dave or Susan has to answer to perform their duties. They simply have to get money into the TGA so that other parts of the government can spend it per Congressional authorization and appropriation.
No, the United States Government Cannot Run Out of Money
Where the money is created turns out to be important for understanding whether the government can ever run out of it. Earlier posts on this Substack blog have argued that the United States is a monetarily sovereign country. It creates its own currency in the process of spending it into the economy in order to mobilize resources for the public purpose. It imposes taxes denominated in that currency to drain spending power from the economy and reduce the threat of inflation. The government does not borrow in foreign currencies or tie the value of the dollar to gold or to any other currency.
In the absence of self-imposed rules (such as the debt ceiling law) that prevent the government from paying all its bills, it can always meet any payment obligation that comes due in its own currency. It can always 'fund' the purchase of any goods and services that are offered for sale in dollars. It can never be pushed into an involuntary default on either principal or interest of any of its debt obligations. The government can no more run out of money than the scorekeeper at a baseball game can run out of points to assign to teams when they score runs.
Some Reading and Listening Suggestions
The Internet is by now swimming with commentaries on the debt ceiling crisis. If, on this holiday weekend, you'd like to dip your toes into this water, here are some suggestions.
Mint the Coin: The fact that the government creates money is most starkly demonstrated by the fact that the Treasury has the authority to mint a $1 trillion platinum coin, deposit it at the Federal Reserve, and thereby neuter the debt ceiling. Listen to the May 22 episode of public radio's Marketplace program. Then read more at Mint the Coin.
Is the Debt Ceiling Law Even Constitutional?: Legal scholars are debating the validity of the debt ceiling law, asking questions like, "What is the least unconstitutional action open to the Biden administration if the TGA runs dry?" See, for example:
Robert Hockett and Laurence Tribe, "Biden can, and should, ignore the GOP’s debt suicide attempt.
Robert Hockett, "A Complaint Template for Legal Challenges to the Validity of the Statutory ‘Debt Ceiling’"
Michael C. Dorf, "Is the Debt Ceiling Law the Most Unconstitutional Statute?"
Questions and concerns? Please write them up in the Comments.