I’m very surprised not to see any US-Federal-Deadline threads here in GQ. Not even the news sites are saying much. My question is fairly simple, or at least it seems so to me. (If I’m wrong, I hope someone can post links.)
Let’s suppose that the guys in Washington come to absolutely no agreement whatsoever, and the current status quo continues into tomorrow and for some time after that. What happens, and when?
They talk about being unable to repay loans. My guess is that this refers to bonds and bills which come due on October 17. If anyone has bills which come due on Oct 16 (today) they can go wherever and get their money today. But you can’t do anything today with the ones that are dated for tomorrow.
Am I right so far? If so, then nothing is going to happen at 12:01 AM, or even at 4:00 AM, because the banks and brokers aren’t open yet. People will panic, but as long as they find the money before 9 AM, all will be fine, right?
Or do they (and exactly who are “they”, anyway?) open before 9 AM? Many have reported that China owns many of these bills and bonds, and their clocks are about 12 hours ahead of Washington DC. Should a Chinese be able to redeem his bonds at 10 AM Thursday, Beijing time? (That’s about 11 hours from now, 10 PM Weds in DC.)
In any case, if Friday arrives with no solution, I’m confident that although many will panic, others will just sit tight and hold on to their investments, hoping that the gov’t will make good someday, and not just write off the debt. But I heard that not everyone will have that option. Specifically, I heard that mutual funds are not allowed to own bonds that have defaulted even in this technical manner, and that the mutuals will be forced to sell off these bonds at a loss. Can someone confirm or correct that? And even if that’s wrong, what similar eventualities might occur?
Nothing, really. People get annoyed, banks find work-arounds.
This is not like a guy who does not have the money to pay his bills. This is like the couple who have an excellent credit rating getting in a nasty row about which bank and how much to take out as a consolidation loan to make their credit card payments. You know sooner or later they will figure things out and get the loan, make their payments, plus penalties and all will be fine (until next time).
So everyone who has a government bond or is owed money by the governmnt will eventually get what they are owed. Banks that hold bonds will eventually get their money.
It is important to note that the congresscritters holding up the works seem to be more agitated about depriving their friend Wall Street of its money than about depriving the average working Joe of his money.
October 17 (tomorrow) is when the Treasury estimated they’d only have $30 billion on hand, which is less than they spend on some days.
According to this article by the Bipartisan Policy Center, the Treasury will completely run out of money some time between Oct. 22 and Nov. 1. The exact day cannot be predicted because the amount of tax revenue and some expenses (e.g. Medicare claims) are variable and fluctuate from day to day.
(I have no idea how balanced that site is, but I’m citing it because the Planet Money blog entry is citing it as the primary source, and they are usually fairly balanced.)
p.s. It’s not clear to me what happens to debt that mature if the debt ceiling isn’t raised. Will they be paid after the ceiling is lifted?
There are two pending “defaults”, one on our debt service, and one on the ability of the government to pay its own workers and other internal expenses.
The debt service default has the the most severe consequences. In 237 years, the United States of America has never missed an interest payment on its debts. During this time, the United States fought two wars against the largest empire on Earth (the British), a war against itself (the Civil War), various skirmishes with the Spanish, and two World Wars; and it never missed a payment. This is why the United States had an undisputed AAA credit rating until two years ago.
If the US defaults on its debt service, then investors will be very hesitant to lend to the government money at low interest rates. They will want higher rates to offset the risk of future missed payments.
If the US rearranges its income to pay only debt service, at the expense of its employees, then the default is less severe. The investors won’t be thrilled, but they don’t care really what happens in the “house” as long as the “mortgage” is paid. There will be economic ramifications of thousands of employees not getting their paychecks, but likely no impact on interest rates.
Currently, there is about 30 Billion in cash that the treasury can stretch to pay its bills for at least another week, maybe two. October 17 is not quite a “do or die” date. However, come October 31st, and November 1st, about 50 billion dollars in debt service comes due. This where the default will start having severe consequences on the economy.
The link I posted says there’s $93 billion in debt maturing on Oct. 24. (And $120 billion on Oct. 17, but presumably that “only $30 billion left” is after paying this $120 billion.) Unless the “debt service” is different from this?
The Planet Money link also has a chart showing the other expenses. $12 billion in Social Security payouts on Oct. 23 seems to be the first big expense that could be affected.
Thank you, that was indeed helpful. About 1/3 of the way down, there is a chart titled, “Debt Maturing between October 15 and November 15” which specifies: “October 17 - $120 billion”. It seems pretty clear that $120 billion is far more than the cash on-hand, even with expected revenues. So why is that not the X Date? My guess is that although $120B will mature on Oct 17, they expect relatively few people to actually demand their money at that point. I suppose it is like being technically in default when I don’t pay my car loan on time, but I still have some time to pay before the repo man arrives.
I think…? The government does not need appropriations to pay SS and other committed payouts. Theya re already mandated.
the government continues to collect money from taxes and import duties, etc.
So it’s like a guy who is short of ready cash until payday… As he receives a few dollars from his friends, he has to decide who among the people he owes gets this money and how much. My guess is SS first. (Probably - paying the people who process tax collection is also a good idea…)
Well, yes, the payments are mandated (as in “you MUST pay this!!!”). But if the government doesn’t have the cash to pay it, and it’s forbidden by law to borrow the money to pay it…
Read scr4’s link. You’re right, basically. But the devil is in the details; in this case, that means trying to decide who to pay first, because there simply isn’t enough to go around, even for the mandated payouts.
The Treasury didn’t say they’re down to $30 billion now. They said that on Oct 17, they will have less than $30 billion on hand. I think that means that after making this $120 billion debt payment on Oct. 17, they will be down to $30 billion.
If two laws are in conflict, it is basically up to the government or the courts to decide which one to obey. In this case, if the government fails to pay on its bonds, a bond-holder could, at least in principle, go to court. If a SS recipient fails to receive his pension, ditto. I assume the same is true for a worker not getting paid. But…if the government decides to ignore the debt limit (maybe saying it conflicts with the 14 amendment, which it does), I cannot see how anyone, individual or corporate, has the standing to go to court. I think the only remedy would be impeachment and I predict it would happen. Of course, it would be an empty gesture, but when has that restrained this congress?
I read that the IRS is among the “non-essential” offices that are closed and hence the revenue stream could already be impacted.
How might they go about doing that? By writing checks when there’s no money in the bank? Or by honoring those checks and allowing the balance to go negative?
I’m not sure exactly what steps there are, and that’s part of why I started this thread.
The administration could just ignore the debt limit, probably illegally, and continue selling bonds. This simply amounts to taking out new loans to pay off old loans, which is what the government normally does all along.
The downsides are:
(1) The courts may ultimately rule that these new bonds were illegally sold in the first place, and thus invalid. In other words, they may rule the new bonds are a scam, and investors who bought them got scammed and their new bonds are toilet paper.
(2) With that possibility hanging in the air, or even without that possibility, investors may seriously wonder if any new bonds would ultimately ever get re-paid. Who would buy those bonds anyway?
(3) So a few bold investors would buy bonds. This might not be enough for the government to finance the spending and payments it needs to do. And on top of that, investors would demand higher interest on those bonds to offset the possibility that they might not get repaid. This, apparently, amounts to something really significant that could be a big budget burden for years into the future.
It may be that, if Obama chooses this route, there may not be any absolute way to forcibly stop that, short of impeachment. There already seem to be some whisperings that conservative Congressional Republicans will try this. Nobody sane takes this seriously. There’s no way in the world that any impeachment could get anywhere.
Somebody is still paying that for that check if the balance is negative. This is still a loan from the bank that holds the account. I don’t know the details of the debt ceiling law, but if it includes debt in all forms, then “overdrafting” would not be permitted.