Treasury default requires reprogramming

In case anyone thinks spending is operationally revenue constrained. Unless they reprogram the computers, the Treasury will routinely make all payments on a timely basis. And those payments create ‘real dollars’ in private bank accounts that can be spent regardless of tax revenues, and without borrowing from the likes of China.

And tonight’s speeches seemed to me confirmation of a power move by the Speaker of the House. He announced that on Wed the house will pass a modified bill that the Senate will also pass and send to the President’s desk for signature. If he succeeds, he will emerge as the leader who, from now on, will be the one to organize and have bills introduced and passed by both Houses. And on the odd chance that the economy improves, he’s positioned himself to be the Republican candidate for President.

“Steve McMillin, a former deputy director of the White House Office of Management and Budget under Bush, said Treasury has options but most of them are “pretty ugly.”

If Treasury were to decide to delay payments, it would need to re-program government computers that generate automatic payments as they fall due — a massive and difficult undertaking. Treasury makes about 3 million payments each day.”

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54 Responses to Treasury default requires reprogramming

  1. beowulf says:

    @Anon,
    Short answer, wrong section of FRA but right idea (longer answer stuck in moderation).
    Also this… If you search for a Tsy overdraft, you will not find it, but if you wait for CHECKS to present themselves FROM THE UNITED STATES, you will find peace.
    :o)

    Reply

  2. Ramanan says:

    Why has everyone concluded that the US will default if nothing happens by Aug 1/2 ?

    The Treasury Secretary can continue extra “extra-ordinary measures” isn’t it ?

    The US government finances its deficit by
    (a) selling assets
    (b) issuing Treasury securities

    with (b) done mostly

    The Treasury has been doing (a) for example, selling foreign currency from the Exchange Stabilization Fund etc etc plus a few things.

    The intragovernmental holding is around $2-3T or more. There is nothing preventing (??) the Treasury to keep selling them and orally promise the funds to pay their bills when they come due.

    The President also has the power to allow the Treasury Secretary to issue Securities which do not count in the debt subject to limit.

    Meanwhile the ISDA has given the US 3 grace days http://www.reuters.com/article/2011/07/26/businesspro-us-usa-bonds-cds-idUSTRE76P4BZ20110726

    Reply

    Unforgiven Reply:

    @Ramanan, “The President also has the power to allow the Treasury Secretary to issue Securities which do not count in the debt subject to limit.”

    You mean the coins?

    Reply

    Ramanan Reply:

    @Unforgiven,

    Don’t think they will take that path of minting a platinum coin.


    In the past, Congress and the Secretary of the Treasury have taken additional actions beyond those described above when necessary to ensure that the government paid its obligations as they came due without breaching the debt limit. For example, in 1996, Congress passed and the President signed legislation allowing Treasury to issue securities temporarily excluded from the debt limit in an amount equal to the March 1996 Social Security payments to ensure that benefit payments were made on time.

    – page 9 here (page 14 in the pdf) http://www.gao.gov/new.items/d11203.pdf

    There are more options. Agencies can issue debt and pay the Treasury and this debt doesn’t qualify in the debt ceiling. Of course as I said, intragovernmental accounts hold a lot of Treasury securities and these can be sold in the market.

    Reply

    ESM Reply:

    @Ramanan,

    “Meanwhile the ISDA has given the US 3 grace days”

    It hasn’t given the US a 3-day grace period. It has given (or acknowledged, rather) that investors who are short CDS protection are saved if the US cures any technical default within 3 business days.

    In any event, the same article states that US CDS (5-year tenor I believe) is trading at about 57 bps per annum. This means that no serious people are particularly worried about even a technical default in the US.

    Germany trades higher, as does (in order of increasing spread) the UK, Japan, and France. For reference, Greece trades at over 1600 bps/annum.

    Quite a bit of ink is being spilled about a whole lot of nothing.

    Reply

    Ramanan Reply:

    @ESM,

    Well I reported the title of the article.

    The phrase “grace period” was used by an ISDA person… there is no meaning to giving a grace period to the CDS writer since he cannot do anything.

    “”There does not appear to be clarity about grace periods on Treasuries and we are currently researching this issue,” David Geen, general counsel at trade association the International Swaps and Derivatives Association, told IFR, a Thomson Reuters service”

    Second, its okay if the CDS is 57bp – lesser than other nations. Such logic assumes the “market is always right”.

    Anyways, if there is default and causes catastrophic selloff, Euro Zone nations will default as well… and Euro Zone nations can default even if the US doesn’t. So Euro Zone nations can have CDSs trading at higher levels.

    So 57bp doesn’t mean the US cannot default.

    The whole thing is not nothing – the US once came close to 5 minutes from defaulting because of the debt ceiling issue.

    More importantly, so much time has been wasted in fiscal restraint and it has drained so much demand.

    Reply

    Ramanan Reply:

    @Ramanan,

    Plus don’t forget the amount of spending cuts bargained by the blackmail!

    ESM Reply:

    @Ramanan,

    “Such logic assumes the “market is always right”.”

    No, the market can be wrong. In fact, I make a living off of the market being inefficient.

    My logic rather is that anybody who claims default is likely and imminent is either a bloviator or a fool, because otherwise he would be finding a way to buy CDS protection on the US at 57 bps/annum.

    Ironically, it wasn’t that long ago that there were some commentators on this blog who were recommending selling US CDS protection in unlimited size because the US has a fiat currency and therefore can never be forced to default. Perhaps some of those same commentators are running around like chicken littles today.

    WARREN MOSLER Reply:

    the fed should sell cds. if there is a default, the fed would be oligated to buy tsy secs at par. no big deal for the fed

    ESM Reply:

    @Ramanan,

    “Plus don’t forget the amount of spending cuts bargained by the blackmail!”

    The spending cuts at worst are made over 10 years to projections about spending that are already too optimistic (from a budget hawk’s point of view). Such theoretical spending cuts won’t do any real damage. The only thing that could do real short-term damage to the economy is a tax hike, and President Petulant seems willing to hold his breath and stamp his feet until he gets it.

    beowulf Reply:

    @ESM,
    You’re right. Its 100% Obama’s fault that he let deficit reduction got brought into this. You can’t stand on principle and haggle at the same time. Just as the govt doesn’t negotiate with hostage takers, Obama should declared from first to last that the validity of public debt is not negotiable and demanded a clean debt ceiling hike.

    Oops, maybe the govt DOES negotiate with hostage takes:
    “We all know that the middle-class tax cuts were being held hostage to the high-end tax cuts. It’s tempting to not negotiate with ‘hostage takers,’ unless the hostage gets harmed. In this case the hostage was the American people.”

    anon Reply:

    bewolf:

    have you looked at this:

    “section 13(3) gives the fed extraordinary authority under exigent and unusual circumstances. this was the “bear stearns” provision. while amended by dodd-frank, the fed can still give the treasury overdraft availability under this provision in order to prevent default, imho”

    (comment at pragcap)

    beowulf Reply:

    @Anon,

    Interesting argument that relies on a distinction between Fed’s monetary role handling Tsy bonds, notes or bills (which must be bought or sold on open market) and Fed’s check clearing role. This is a point “roidubouloi” made recently at The New Republic site.
    http://www.tnr.com/article/politics/90659/debt-ceiling-obama-congress

    If I were a guru in a remote Ashram– my words of advice to you all (especially Brother Warren) is this:
    If you seearch for a Tsy overdraft, you will not find it, but if you wait for CHECKS to present themselves FROM THE UNITED STATES, you will find peace.

    If Tsy and Fed agree (and no one else has standing to challenge this in court) that Tsy drafts are not public debt, why bother raising the debt ceiling, ever? Geithner would need balls of platinum to pull off this caper. Call it the Cee Lo Green Option.
    http://youtu.be/pc0mxOXbWIU

    Let me unpack this… Its unnecessary to go to Sect 13(3) [to use FRA numbering] which in Title 12 is part of Section “343. Discount of obligations arising out of actual commercial transactions”. (The online version of the US Code hasn’t been updated since Dodd-Frank, but as I said its irrelevant anyway).
    http://www.law.cornell.edu/uscode/12/usc_sec_12_00000343—-000-.html

    13(3) permits nonbanks to go to the discount window during unusual and exigent circumstances. But don’t forget banks (non-nonbanks if you will) always have the right to go to the discount window and has it happens there’s another non-nonbank to consider. See Section “342. Deposits; exchange and collection; member and nonmember banks or other depository institutions; charges”.

    “Any Federal Reserve bank may receive from any of its member banks, or other depository institutions, AND FROM THE UNITED STATES, deposits of current funds in lawful money, national-bank notes, Federal reserve notes, or CHECKS, and drafts, payable upon presentation or other items…”
    http://www.law.cornell.edu/uscode/uscode12/usc_sec_12_00000342—-000-.html

    Ramanan Reply:

    “My logic rather is that anybody who claims default is likely and imminent is either a bloviator or a fool, because otherwise he would be finding a way to buy CDS protection on the US at 57 bps/annum.”

    ESM,

    While I agree on some points, its not so straightforward.

    People are pointing out that there is huge amount of uncertainty around and the US politicians are playing with fire.

    Financial firms are just worried about what might happen if …

    For example there can be a downgrade even if there is no default .. don’t tell me it doesn’t matter. The downgrade can affect other firms … banks deposits are guaranteed by FDIC and they could get downgraded.

    But in general, my comment did start off asking why is everyone assuming a default if nothing happens by Aug 2. The Treasury can just do further “extraordinary measures”.

  3. Tim says:

    “If Treasury were to decide to delay payments, it would need to re-program government computers that generate automatic payments as they fall due — a massive and difficult undertaking.”

    It seems the US government is operationally constrained to default on its obligations. So the rating agencies need to make a difference between willingness to default and ability to default.

    Reply

    Kristjan Reply:

    @Tim,
    :)

    Reply

    Ramanan Reply:

    @Tim,

    Of course the S&P distinguishes ability and willingness

    http://www2.standardandpoors.com/spf/pdf/fixedincome/KR_sovereign_APrimer_Eng.pdf

    Reply

  4. TC says:

    It’s like a good twin of the Y2K scare.

    Reply

  5. gaius marius says:

    @warren — did you happen to see this piece by chris cook in the asia times?

    Reply

    WARREN MOSLER Reply:

    Just read it thanks, quite well done! direct him to my book?

    Reply

    gaius marius Reply:

    @WARREN MOSLER, i engaged him a bit in the comments at ft alphaville.

    Reply

    Crake Reply:

    @gaius marius,

    That article was great. We need it re-printed in major US newspapers or printed on 1000s of sheets of paper and thrown around Washington streets.

    Reply

    Anthony Reply:

    If I understand this correctly, the Treasury’s account at the Fed is useful for check clearing purposes, but its balance doesn’t really matter. So in a hypothetical economy in which only fiscal policy is used to regulate aggregate demand, in which it is adjusted to accommodate the saving desires of the private sector, and in which there is no external sector, the Treasury’s account at the Fed always would be overdrawn to an amount matching the private sector’s desire to save in dollars. Correct?

    Reply

    WARREN MOSLER Reply:

    yes, agreed!

    Reply

    beowulf Reply:

    @WARREN MOSLER,

    I like his reframing of public debt as tax credits outstanding. If there’s no taxes, then tax credits are worthless. If there’s no tax credits, you can’t pay your tax bill (or anything else).

    Downthread I suggest that Tsy and Fed could use the Cee-Lo Green option (mustn’t forget the hyphen). If they do, this Fed accounting change in January would come in handy, no?
    The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital. It would then simply direct future profits from Fed operations toward that liability…
    “Any future losses the Fed may incur will now show up as a negative liability as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible,” said Brian Smedley, a rates strategist at Bank of America-Merrill Lynch and a former New York Fed staffer.

    http://www.economicpolicyjournal.com/2011/01/hot-fed-hides-major-accounting-change.html

    WARREN MOSLER Reply:

    I may have started calling dollars tax credits back in soft currency economics?
    in any case that’s all they are

    Tom Hickey Reply:

    @WARREN MOSLER,

    Soft Currency Economics, p. 3: “Fiat money is a tax credit not backed by any
    tangible asset.

    WARREN MOSLER Reply:

    thought so!

    beowulf Reply:

    @WARREN MOSLER,
    That’s funny! I should have figured it was your idea first.
    OT but speaking of your ideas (and you have so many, you’re like a high-IQ Newt Gingrich), your job guarantee-based development plan is probably an important element these “Civilization in a Box” guys are missing– well that and “medical school in a box”. :o)
    http://moslereconomics.com/mandatory-readings/mosler-palestinian-development-plan/

    Our prototype village aims to demonstrate that we can create a complete economy from local resources on ~1000 acres via regenerative resource use – for ecological living with modern-day comforts, minus resource conflicts… GVCS seeks to redesign, build and distribute a set of 50 universal tools that provide the foundation for creating or restoring resilient community based economies
    http://challenge.bfi.org/2011Semi_Finalist_GlobalVillageConstructionSet

    Neil Wilson Reply:

    @Anthony,

    In an economy using fiscal policy it’s likely the central bank wouldn’t exist.

    AIUI the Government Treasury function could mark up and mark down accounts directly at private banks just as easily.

    I suppose we could keep the central bank as part of the Job Guarantee system. :)

    Reply

    Tom Hickey Reply:

    @Neil Wilson,

    The “cb” would be the computers marking up the spreadsheets and taking care of settlement electronically.

  6. Crake says:

    On a positive note:
    If the debt ceiling is not raised, I think we could seriously see an MMT realization epiphany seed sprouting in mainstream economic and finance circles.

    For example, on NPR this morning, a financial reporter with The Washington Post was interviewed. The reporter was stating that the “Chinese” have little choice but to put their US dollars into treasuries. He was discussing that the net dollars that next exporting nations have come from their trading practices with the US and they have little choice but to put those dollars into treasuries.

    Are we close to the situation of many in the financial community having an ah-ha momentum in realizing that neither China nor any other trading partner country is funding US deficit spending then the next step for them would be realizing no other entities nor people are eithe?

    Reply

    WARREN MOSLER Reply:

    hope so

    Reply

    Tom Hickey Reply:

    @Crake,

    I don’t see any epiphany coming in time to avert implementation of the craziness. Looks to me like we are going to another empirical test of neoliberalism. How many contraindicative experiments does it take to overturn a failed paradigm?

    Reply

    Crake Reply:

    @Tom Hickey,

    Sometimes craziness drive genius or is that other way around :)

    Reply

    Tom Hickey Reply:

    @Crake,

    There’s crazy smart and crazy stupid.

    beowulf Reply:

    @Tom Hickey,
    Perhaps the Tea Party’s role to heighten the contradictions. Karl Marx would LOVE these guys.
    “the protective system in these days is conservative, while the Free Trade system works destructively. It breaks up old nationalities and carries antagonism of proletariat and bourgeoisie to the uttermost point. In a word, the Free Trade system hastens the Social Revolution. In this revolutionary sense alone, gentlemen, I am in favor of Free Trade.
    http://mailstar.net/classwar.html

    Reply

    Tom Hickey Reply:

    @beowulf,

    I also subscribe to Hegel’s philosophy of history, which views human history as the dialectical interplay of opposing ideas conflicting with each other in concrete experience/action. This clash brings about the development of a new idea and new levels of concrete experience/action that reflecting the idea in history as the prevailing Zeitgeist. Sometimes the concrete part gets messy.

    I have said for some time that the prevailing Zeitgeist is neoliberalism as an idea, given concrete expression specifically through Reaganism and Thatcherism. That dynamic is still being played out and the wave is now cresting but still as a way to run before it curls over and crashes. Obama is what he is because it was not yet time for another FDR to bring forth a new idea at a time when it can rise into a new Zeitgeist.

    What happens a a time of profound historical change is a paradigm shift in which the old paradigm and its universe of discourse and norms is replaced with a new one. Obviously we are not there yet. The president and the Democratic establishment are reacting to the GOP within the frame established by the GOP, and that frame is pulled in a tug-of-war between the establishment representing vested interests and the Tea Party committed to ideological purity.

    The Tea Party seem to have the upper hand in the tug-of-war due to the threat of a primary challenges. The GOP is united in their desire to see the president fail (McConnell) but the Tea Party is out to “break him” (DeMint). The Tea Party would like to force a default and then impeach Obama for having refuse their ultimatum of a balanced budget amendment voted on by Congress and approved by the president. Whether they can pull that off remains to be seen, but that seems to be the intension. They are committed to laying it all on the line. Some ideas die hard. This promises to be one of them.

    As I said, get out the popcorn and enjoy the show. It’s history in the making, likely to be a wild ride for some time, with the outcome uncertain, even if at the last minute this manufactured crisis is solved by passage of a clean bill. We still have the budget coming up, and then the campaign swings into full gear. Not to mention all the excitement in the EZ, economic collapse in the UK, and China struggling to avoid a hard landing.

    But when the smoke clears sometime in the unknown future, there will be a new paradigm rising to replace the old worn-out one. Students of history have seen this plot unfold many times in the past since it has been used in many different “plays.”

  7. Kostas Kalevras says:

    Dear Warren. Since the Treasury is not allowed an overdraft in it’s account at the Fed wouldn’t some of the payments bounce due to ‘low funds available’ (after the balance of the TTL accounts had first become zero of course)?

    Reply

    Crake Reply:

    @Kostas Kalevras,

    This is interesting. Would the Fed always clear Treasury payments (the Treasury does not spend from a deposit account per the Fed’s own words) and the need to issue debt is basically an accounting process after the fact to make the books balance?

    Anyone know the exact process(es)?

    Reply

    WARREN MOSLER Reply:

    yes, the need for the tsy to borrow in order to spend is a self imposed constraint imposed by the same congress that ordered the spending

    Reply

    WARREN MOSLER Reply:

    yes, in theory, but in practice they may have to reprogram their computers as well

    Reply

    Ed Rombach Reply:

    @Kostas Kalevras,

    Would a Treasury overdraft at the Fed be considered part of the national debt for purposes of factoring into the debt ceiling?

    Reply

  8. Benedict@Large says:

    And on the odd chance that the economy improves, …

    Are you serious? An “odd chance” is when you win a roulette bet. These odds can only be calculated in a science fiction movie.

    Reply

  9. Crake says:

    “And tonight’s speeches seemed to me confirmation of a power move by the Speaker of the House. He announced that on Wed the house will pass a modified bill that the Senate will also pass and send to the President’s desk for signature. If he succeeds, he will emerge as the leader who, from now on, will be the one to organize and have bills introduced and passed by both Houses. And on the odd chance that the economy improves, he’s positioned himself to be the Republican candidate for President. “

    From reports I have read, Representative Boehner will be putting forth a bill similar to one that has already been drafted in the Senate. How does rubber-stamping/copying a Senate bill, in an exercise that anyone can see is designed to weaken or hurt the President, going to put the Speaker into a position to introduce “original” bills that will go through both houses? Going from an exercise designed to attack the executive branch, while simply copying the Senate in an attempt to gain it as an allying in that effort to a situation of leadership over both houses is a pretty gigantic leap unless the underlying premise is that both houses want to rebel. Instead is this possibly just a move of desperation by the Speaker to ward off future moves by the tea party element to replace him as Speaker?

    Reply

    WARREN MOSLER Reply:

    i think we are saying the same thing

    Reply

    Crake Reply:

    @WARREN MOSLER,

    News today is stating Boehner does not have the votes and conservative and tea party factions, within the House, are publicly refusing as Cantor was telling them to quit grumbling and get together.

    After his presentation last night, Boehner will look the fool, not the lord over the Senate and House, if he cannot even get House votes for it.

    And if Boehner, in trying to have coupe against the President, instead has mutiny in his own House, were does this put the nation on the debt ceiling. Is it not looking very possible that the ceiling will not be increased – the markets seem to not think that is a real risk yet???

    Reply

    WARREN MOSLER Reply:

    agreed

  10. luigi says:

    I would be the technician that re-program computers at Treasury. I could be the hero that saves America.

    Reply

    Rodger Malcolm Mitchell Reply:

    @luigi, Or the guy who helped destroy the American economy.

    Reply

    luigi Reply:

    @Rodger Malcolm Mitchell,

    yeah, but in America, and everywhere they call heroes people that are not heroes, so
    probably I’ll be considered a true hero. like obama, people that have killed Osama, every soldier that dies in afghanistan etc

    Reply

    ESM Reply:

    @luigi,

    Well you could be an Italian-American hero, but not one of the true (and tasty) ones.

    Unforgiven Reply:

    Ooops! Looks like I only managed to stop paychecks to the House and the Senate. Well, that uses up my budget.

    Guess I’ll have to wait till next year to finish the rest of it.

    Regards –

    BOFH

    Reply

    Neil Wilson Reply:

    @luigi,

    Particularly if you hit the wrong button and did a ‘virtual helicopter drop’ instead.

    Mark everybody up $5000.

    Reply

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