Don't worry about the debt ceiling: the federal government can't run out of money!

Debtor Nation

From The Washington Post:

Trump didn’t solve the debt ceiling crisis. He just delayed it

By Heather Long | September 6, 2017 | 4:46 PM EDT

John Chambers thought of himself as a quiet, nerdy guy until he started receiving death threats in 2011. The next thing he knew, his Gmail account was hacked and he received an alert that someone was trying to steal money from his investment account.

Chambers was one of three authors of an August 2011 Standard & Poor’s report that lowered the U.S. credit rating, saying American federal government bonds were no longer AAA — the highest rating issued — because “political brinkmanship” between Republicans and Democrats over the nation’s finances meant the country was no longer an absolute guarantee to repay the money it owed.

The report, which stripped the country of a AAA rating it had enjoyed for 70 years, stunned the world and drew furious pushback from the top Obama administration officials. It also turned Chambers’ life upside down. Threats from strangers to harm him and his family became so bad that S&P hired a bodyguard to follow him for two weeks. Chambers, who lived in New York City at the time, couldn’t even walk his dogs in sleepy Riverside Park without an armed guard. He was instructed not to take the subway.

Six years later, Chambers feels vindicated in his call.

Since the downgrade, the nation’s lawmakers have held a series of standoffs over the nation’s finances, using the threat of default in an attempt to leverage other concessions on spending and taxation. And while the nation has yet to default, a lurch from one crisis to the next appears to be the new normal when it comes to the United States paying its bills.

The latest standoff appears to have been temporarily defused on Wednesday, as President Trump said he had managed to negotiate a deal with Democrats to avoid default. Trump and top Democratic leaders said they agreed to raise the debt ceiling — a cap on how much money the government can borrow to pays its bills and repay off its loans — for another three months, as well as providing aid to hurricane-afflicted parts of the country.

If approved, the deal moves the country away from an immediate crisis. The U.S. Treasury had just $32 billion in cash on hand when it made its latest report on Sept. 1, only enough to keep the government out of default for a few weeks.

There’s more at the link, but, to summarize — rather than plagiarize! — Miss Long noted that previous debt ceiling and government shutdown crises occurred when the Congress was controlled, or one House of Congress was controlled, by the President’s opposition party; this is the first time we’ve faced such a thing when the same party controlled both Houses of Congress and the White House.

But, as so many conservatives have noted, President Trump isn’t a typical Republican. For many years, he was a Democrat, and both he and his son, Donald Trump, Jr, made political contributions to Hillary Clinton in 2002, 2005, 2006 and 2007. There are some actually serious conservatives in the Republican party, conservatives staunchly opposed to increasing the debt ceiling, and thus it requires some Democratic votes to extend it.

However — and I’m a lonely voice in the wilderness in noting this — it doesn’t actually matter, because the government will not run out of money because it cannot run out of money.

Why? As Miss Long noted, the government reported that it had but $32 billion on hand, and, combined with anticipated receipts, that will last only until mid-September. So, what happens when the government writes a check for which it has insufficient funds on hand? The checks are still good, that’s what happens!

“What? How can this be?” you ask. If you or I write a check for which we lack sufficient finds, the bank on which the check is drawn will ‘bounce’ the check. But if the United States Treasury writes a check,¹ and there’s not enough money in the Treasury to cover it, who bounces the check?

There is no precedent to answer that question, because a United States Treasury check has never bounced. The Treasury Department issues a daily balance report, and the closing balance as of September 5, 2017, was $40.456 billion. The Financial Management Service has a couple thousand diligent employees to monitor spending, to insure that none of the myriad of federal agencies writes more in checks than there are funds to cover them. No one has ever bounced a Treasury check, because there have always been sufficient funds to cover them.

But if the money wasn’t there, there’s still no one to bounce the check!

The federal government keeps a single checking account at the Federal Reserve Bank of New York; who is going to be the first Fed employee to mark a check “Insufficient Funds” and return it?

Way back in Economics 101 we all learned the concept of the creation of money by commercial banks. By similar logic, if the Treasury issues a check for which there are insufficient funds to cover it, but no one bounces the check, then new money has been created. Sound flaky? The Federal Reserve has already been doing that, through three rounds of quantitative easing.

Of course, the good folks at the Federal Reserve never let quantitative easing get out of hand; they kept it at a moderate level, because doing it too aggressively might have caused a loss of confidence in the dollar, triggering excessive inflation.² By the same token, while, in theory, the government could just issue checks without taxing us at all, doing that would undermine confidence in the dollar, and thus the Fed and the Treasury Department has to be extremely careful, not using monetary tricks any more than necessary. But, in the end, the federal government will not run out of money because it cannot run out of money.
Cross-posted on The First Street Journal.
¹ – I am using some prosaic license here: most federal payments are now electronic fund transfers rather than issued paper checks. When I have used ‘writing a check’ in this article, I am including EFTs in that phrase.
² – Actually, inflation has been less than the Fed’s target of 2% over the past several years.

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