Lawmakers in Washington are scrambling to get a deal done to raise the debt ceiling deal done before tomorrow, when the Treasury Department says it will have exhausted the extraordinary measures it has been using to avoid breaching the debt ceiling. Come tomorrow, it says, the U.S. government will have just $30 billion in cash on hand, which is much less than the government is legally required to spend on most days.
But outside analysts have said that the Treasury is being conservative in this estimate. As Chris Kreuger of Guggenheim Associates wrote in a research note this morning, the Treasury Department takes in about $7 billion per day and spends roughly $10 billion per day. That means tomorrow “is not the drop dead date,” which would trigger a default on one or more of the government’s obligations. There are, however, several large payments coming up in the next couple weeks that could get us to that point. Those are:
- Oct. 23: $12 billion in Social Security benefit payments;
- Oct. 31: $6 billion in interest payments on the national debt; and
- Nov. 1: $67 billion for Social Security benefits, Medicare payments, military and civilian pay, and veterans benefits
One of these payments, according to Kreuger (and several other independent analysts) are what will finally force the country into default.
So what would happen if the Treasury doesn’t have the money to make all of these payments? That question is difficult to answer. In testimony before Congress last week, Treasury secretary Jack Lew has said that the Treasury’s computer systems are not designed to be able to choose to pay certain bills and not others.
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The complexity of the Treasury payment systems and the fact that there is no legal framework in place to decide what payments get made and what don’t means that the Treasury running out of cash would create a lot of stress for both average Americans and financial markets. But some analysts like Goldman Sachs’ Alec Phillips have assumed in their projections that Treasury would be able to at least make sure that interest payments on the debt are made because they are funneled through a different computer system than that which deals with general government expenditures.
But the fact of the matter is that even these very smart analysts are simply hypothesizing as to what would happen when we run out of money. It’s possible that the Treasury Department would be able to rig the system so that we don’t miss any interest payments, and thus avoid the sort of global financial panic that would ensue from the U.S. not paying its creditors on time, but nobody knows for sure.
Even if Treasury can accomplish this feat, defaulting on other government obligations would have widespread effects. As Phillips wrote last week referring to a default on non-interest obligations:
“While we can estimate the amount of the drop in outlays, the effect on GDP growth in the quarter is uncertain and we have not tried to estimate it . . . That said, it is clear that a pullback of the magnitude we estimate could result in a meaningfully negative effect on economic activity if not addressed quickly.”
In other words, if Congress fails to act in the coming days, we’re probably staring down the barrel at least a recession, if not a global financial panic. Let’s just hope they can strike a deal.