The most urgent question in the bitter Washington showdown over the federal debt limit is one that the US Treasury refuses to answer: what happens if it runs out of cash?
While lawmakers and administrations past have come close to failing to address the debt limit in time — hours away in the 2011 instance — they’ve always reached a deal before the Treasury Department’s cash balance became too low to make all federal payments coming due.
This time, some observers say, could be different. Goldman Sachs Group Inc.’s base case is that a deal is done the day of the so-called X-date, plus or minus one day — in other words, the partisan standoff could go a day beyond that point. Morgan Stanley says there’s a “meaningful risk” of going past X-date.
JPMorgan Chase & Co. has set up a “war room” looking at contingencies, Chief Executive Officer Jamie Dimon said in a Bloomberg Television interview Thursday.
Treasury Secretary Janet Yellen has followed her predecessors in refraining from spelling out exactly what the department would do in the worst-case scenario of Congress failing to raise or suspend the debt ceiling in time.
Detailing any plan could suggest that damage from the event could be mitigated — reducing lawmakers’ incentive to act. It would also risk stoking opponents to whatever contingency the Treasury conceives of.
Still, Yellen this week acknowledged that there are choices to be made if lawmakers don’t act in time.
“If Congress doesn’t raise the debt ceiling, the president will have to make some decisions about what to do with the resources that we do have,” Yellen said in a May 8 interview with CNBC.
The administration could keep making all payments by invoking the 14th Amendment to the Constitution — which says the validity of public debts “shall not be questioned” — but that would involve a high-stakes legal fight, as President Joe Biden noted earlier this month.
If that option is set aside, one widespread assumption is that the Treasury would use the cash and revenue it does have to ensure that payments are made on government debt.
Failing to service Treasuries, which are the world’s largest bond market and a benchmark for borrowing costs worldwide, is viewed by most economists and investors as a shock that could trigger a financial meltdown — and a risk that officials wouldn’t take.
“No one wins in this situation, politically, but from a ‘do the least harm’ long-term, you want to protect the debt service,” said Stephen Myrow, a managing partner at Beacon Policy Advisors and a former Treasury official.
That assumption relies in part on transcripts from emergency Federal Reserve conference calls in 2011 and 2013 during past debt-limit standoffs.
A Fed official who had worked with Treasury counterparts told policymakers in August 2011 that the assumptions included “that principal and interest on Treasury securities would continue to be made on time.”
Yellen — who participated in those 2011 and 2013 meetings as the Fed’s vice chair — has tried to introduce some doubt over that contingency. She said in a January interview that the plan was never agreed to, and the discussions back then show “you have no guarantees that would work.”
Asked about contingency plans Thursday, the Treasury referred to Yellen’s latest remarks on the debt limit. She reiterated while on a visit to Japan “the urgent need” for Congress to act as soon as possible.
Deputy Treasury Secretary Wally Adeyemo, speaking on Bloomberg TV Thursday, said: “What I would say to anyone who thinks there’s a way to avoid default without Congress doing what it’s done 78 times since” the 1960s “is to say that they’re wrong.”
Dimon on Thursday also highlighted the unpredictability of the situation the closer the US gets to X-date. “We’ve got to be very careful about a situation that gets close to that,” he said, because of the risk of “panic” behavior. “Panic is the one thing that scares people. They take irrational decisions.”
Still, assuming that the Treasury did keep making payments on debt securities, the Biden administration would next need to decide whether to keep paying the vast amount of other obligations — ranging from Social Security and defense payments to federal salaries and government agencies from the Federal Aviation Administration to Customs and Border Protection.
“It is unlikely that the federal government would be able to issue payments to millions of Americans, including our military families and seniors who rely on Social Security,” Yellen warned in February.
Not everyone thinks that’s true. One former White House economic aide who now counsels market participants said that, once faced with a brutal choice, the Treasury would at the least try to prioritize the payments owed to Social Security recipients. There were almost 52 million retirement beneficiaries as of March.
It may, however, be difficult. Payments on Treasuries are handled over Fedwire, a different payments system than the one that handles government benefits and payments to contractors, so those may be easier to separate out.
It would be logistically “far more challenging” for the payment system to pull out some non-interest payments while keeping others in place, according to Wendy Edelberg, director of the Hamilton Project and a senior fellow in economic studies at the Brookings Institution.
Edelberg estimates that if the Treasury decided to continue making its interest payments, other outlays would need to be cut by about 25%. If it also continued to make Social Security payments, then the hit to other obligations could be as high as roughly one third.
“Beyond the logistics, it is a terrible idea for Treasury to unilaterally, without legislation enacted by Congress, decide which payments to make and which payments to postpone,” she added. Legal challenges would also ensue, she noted.
Social Security payments go out four times a month, with about $25 billion each time, so whenever the Treasury does hit the X-date, it would probably not be “more than a few days away ” from such an outlay coming due, according to Alec Phillips, Goldman’s chief US political economist. The political sensitivities would help to force a deal, he predicted.
By Viktoria Dendrinou / Bloomberg