Extraordinary Politicking

Fiscal cliff and debt ceiling histrionics hit fever pitch Wednesday after Treasury Secretary Tim Geithner notified Congress the US would reach the “debt ceiling” on December 31. The letter, which theatrically coincided with President Obama’s early return from vacation, cautioned the US would “default on its legal obligations” were it not for the Treasury’s “extraordinary measures”—and even those might only buy a few months’ time. We’ve detailed our views on the purely political debt ceiling before, like here, here and here. However, the curious-minded might ponder Geithner’s extraordinary measures to buy Congress additional time to reach accord afford politicians time to politick. What exactly do these entail? Mask and cape? Or something decidedly less heroic?

Secretary Geithner specifically outlined four actions to keep the US under the $16.4 trillion debt ceiling: suspend Treasury sales to state and local governments (SLGS), redeem existing and suspend new investments in the Civil Service Retirement and Disability and Postal Service Retirees Heath Care Funds, suspend reinvestment in the Government Securities Investment Fund (G Fund) and suspend reinvestment of the Exchange Stabilization Fund. All told, the measures free up approximately $200 billion in headroom under the limit. (The space between Uncle Sam’s couch cushions is wide, indeed.) But with the US accruing new debt at a pace of about $100 billion per month, the measures alone likely only buy the US time until February. Of course, US debt accrual varies significantly from month to month, so the Treasury’s measures might not last as long as expected or might last a little longer.

Generally speaking, the measures amount to a little budgetary trickery and accounting gimmickery, allowing the Treasury to buy back its own debt or sidestepping requirements for the Treasury to issue new debt, reinvest proceeds into debt or make new investments when existing debt expires. For example, SLGS securities are issued (as their name implies) to state and local governments to invest cash proceeds of any bond measures issued for local projects. Once the Treasury suspends the sale of these securities, state and local governments will have to find an alternative investment meeting IRS guidelines. Likewise, the G Fund is basically a money market fund for federal employees’ thrift savings plans. In extraordinary times, the Treasury is allowed to suspend the daily reinvestment of the fund into new treasury securities and dip into the fund. Payments from the fund (to government employees, etc.) continue to be made, so long as extraordinary measures haven’t been exhausted. Once a bill to raise the debt ceiling is passed, the G Fund is made whole (saving government employees from taking any losses on account of their employer).

According to the Treasury, other measures used in the past are expired, not effective or not advisable this time around. For example, in 1995, instead of simply raising the debt ceiling, Congress created some additional time for the Treasury by passing legislation that temporarily allowed certain debt issuance without counting the bonds against the limit. The Treasury’s mandate to issue such securities expired in 1996. But this highlights the all too made-up and political nature of the debt ceiling—Congress can set an arbitrary cap on the absolute amount of debt but can also circumvent its own cap by passing legislation that exempts some new debt from counting against that cap.

At the end of the day, politicking on the debt ceiling and fiscal cliff is likely to continue. Thanks to the Treasury’s extraordinary measures, politicians likely have a few more months of debt-ceiling grandstanding on this go-round. But when it ceases to be politically expedient (perhaps that’ll be near February), it’s likely politicians will likely find a way to kick the can down the road (raise the debt ceiling) just long enough until the next politically convenient time. And with so much on the line for both parties in 2014’s mid-term elections, we wouldn’t be too surprised if we revisited this issue right around then.