Chris Hildebrand contributed to this post.
A new analysis by the Bipartisan Policy Center (BPC) looks into when the Treasury Department will no longer be able to pay all of its bills, and more importantly, analyzes what such an event would mean for the federal government and for markets around the world.
Treasury has, for over a month now, found itself up against the wall of the debt ceiling and thus unable to borrow additional funds. In essence, this means Treasury is sitting on a finite amount of cash – bolstered by some extraordinary measures and daily tax receipts – that they are using to fund the federal government. This supply of cash, however, is being steadily and slowly depleted almost every day, as Treasury spends more than it takes in.
According to our analysis, on or around August 2nd, Treasury will run short of cash and be unable to pay all of its bills going forward – we refer to this as the “X Date.” After that point, assuming the debt ceiling has not been raised, Treasury would likely attempt to prioritize, picking winners and losers as it makes certain payments but lacks the cash for others.
As BPC Visiting Scholar Jay Powell told The Hill recently, “there [will] be no way to avoid really serious pain. [If you are] cutting 44 percent of the budget overnight, you are going to be cutting many popular programs, there is no way to avoid it.”
Take one scenario: choosing to protect the safety net programs, Treasury could conceivably pay interest on the debt, Social Security benefits, Medicare and Medicaid provider payments, food stamps and welfare, rent for those on low-income rent assistance, unemployment insurance benefits, Veterans Affairs programs, special education grants, and tuition assistance – and nothing else. Defense vendor payments would be delayed, the active duty military would not be paid, IRS refunds would stop flowing, all federal employees would be furloughed, and the Departments of Justice, Labor, Commerce, Energy, Interior, and Health and Human Services would all be left unfunded.
Complicating matters further, the above scenario relies on the premise that Treasury can mechanically prioritize payments in such a fashion. Treasury makes 80 million payments a month through a computer system that is not designed to prioritize one payment over another. Treasury Secretary Geithner has questioned even the notion that it is feasible.
Moreover, if Treasury immediately has to stop 44% of all federal spending, financial markets world-wide are likely to notice. As a recent USA Today article describes, “the picture gets worse: Layoffs and lawsuits. Market reaction and media glare. A possible downgrade in the U.S. credit rating, perhaps followed by the loss of market access and the demise of the dollar.”
Treasury securities are considered to be the only risk-free financial asset in the world, and as such, form the basis for millions of investments. If a deal to raise the debt ceiling is not reached by the X Date, interest rates on Treasury securities could rise to reflect the presence of risk. Higher rates would, in turn, immediately lower the values of many Americans’ retirement funds, savings, and investments. Under these circumstances, the cost of borrowing would increase, and the global financial system could reel.
Ultimately, Congress and the president will be responsible for charting the path forward. We hope that they will vote to increase the debt limit alongside a serious plan for deficit reduction.