Treasury Notes

 There is Only One Solution to the Debt Limit

By: Daniel Watson

Seven months ago, the outstanding debt of the United States reached the statutory limit set by Congress.  Since then, the Treasury Department has been using extraordinary measures to continue to finance the government on a temporary basis.  That’s because only Congress can raise the debt limit.  Raising the debt limit does not increase spending or authorize new spending – it simply allows the government to pay its bills.
In his ninth letter to Congress this year urging action on the debt limit, Secretary Lew reiterated this week that these extraordinary measures will soon be exhausted.  The only way to protect the full faith and credit of the United States and the American people from serious harm is for Congress to raise the debt limit before that happens.  There are no easy outs and no escape hatches.
But instead of voting on a clean debt limit increase the only solution that reasonably protects our nation’s creditworthiness some in Congress are resuscitating proposals already discredited during previous debt limit impasses. Next week Republicans in the House of Representatives will put H.R. 6‎92, the so-called Default Prevention Act, up for a vote. Proponents of this legislation claim that missing payments on some of our obligations, while prioritizing principal and interest, would be acceptable.  On the contrary, it would be untenable for the United States to pick and choose which payments to default on, and is just another distraction from what Congress needs to do: take action to raise the debt limit as soon as possible.
In 2011 and again in 2013, we watched Congress engage in partisan brinkmanship over the debt limit and fail to act until the last minute.  Those impasses provided important lessons about the effects such behavior can have on financial markets and on our economy.  Prior impasses have raised short-term borrowing costs for taxpayers, negatively impacted the credit rating of the United States, and caused serious harm to consumer confidence. 
As a result of the brinkmanship that led our country to the edge of default in 2011 and 2013, Treasury was forced to consider how it would operate in the unthinkable event that Congress did not fulfill its responsibility to avoid default.  
Some commentators have suggested that the President could invoke the Fourteenth Amendment of the Constitution as a justification for issuing debt in excess of the debt limit.  Others have suggested that Treasury could mint and issue a large-denomination platinum coin to obtain cash without exceeding the debt limit.  But as we’ve said before, the Fourteenth Amendment does not give the President the power to ignore the debt ceiling.  And neither the Treasury nor the Federal Reserve believes that the law can or should be used to produce platinum coins for the purpose of avoiding an increase in the debt limit. 
As the Chair of the Council of the Inspectors General on Financial Oversight (CIGFO) explained in 2012, Treasury found no option that could reasonably protect the full faith and credit of the United States and the American people from very serious harm.  Additionally, CIGFO noted that Treasury viewed the option of delaying payments as the least harmful among these options.  But this option would still be default.  Fortunately, because Congress ultimately took action, no final decision was needed.
With some in Congress again suggesting that we prioritize principal and interest while missing payments on other obligations, it’s worth considering again why this is such an unacceptable outcome.  It is simply default by another name.
As Treasury considered our options during prior debt limit impasses, we conferred with the Federal Reserve Bank of New York about the possibility of continuing to pay principal and interest on our debts on time.  We described this process to Congress in 2014:
“If the debt limit were not raised, and assuming Treasury had sufficient cash on hand, the New York Fed’s systems would be technologically capable of continuing to make principal and interest payments while Treasury was not making other kinds of payments, although this approach would be entirely experimental and create unacceptable risk to both domestic and global financial markets.”
Principal and interest on the debt are only part of our obligations. Prioritizing principal and interest would mean paying some of our creditors – many of whom are foreign institutions – while defaulting on across-the-board payments everywhere else.  That would include payments to members of the military, veterans, and senior citizens.  It would include payments on infrastructure projects.  In this scenario that America defaults on its obligations, there would be no way to prevent significant disruptions and hardship for millions of Americans. Default would undermine confidence in the creditworthiness of the United States. 
Some have gone further to suggest that Treasury could prioritize certain payments other than principal and interest.  Treasury’s payment systems are designed to pay our bills – they were not designed to not pay our bills.  Our systems disburse payments in an automated process.  Attempting to manually prioritize among more than 80 million payments made by the federal government each month – to troops, veterans, Social Security recipients, Medicare recipients, vendors, etc. – would be uncharted territory that’s fraught with risk.
And how could we make these choices? During the 2013 debt limit debate, Secretary Lew summed this up well:
“How can the United States choose whether to send Social Security checks to seniors or pay benefits to Veterans? How can the United States choose whether to provide children with food assistance or meet our obligations to Medicare providers?
“The United States should not be put in a position of making such perilous choices for our economy and our citizens. There is no way of knowing the irrevocable damage such an approach would have on our economy and financial markets.”
Accepting any of these ideas means accepting default.
For 226 years, we have been a country that pays all our bills.  We can’t break that trust with our creditors and investors and put the full faith and credit of the United States in question.  And we can’t break that trust with our citizens.
To remove the unnecessary and avoidable threats to our economy and the wellbeing of our citizens, we have continued to urge Congress to take action as soon as possible and raise the debt limit before Treasury exhausts its extraordinary measures.
Posted in:  Debt Limit
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