Fed Debt Limit Breach: U.S. in “Technical Default”

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2005 budgetIn November 2004, lawmakers voted to once again increase the public debt ceiling from $7.39 trillion to $8.18 trillion. December of 2005, as the spending cap neared the limit, Treasury Secretary John Snow told Congress that the government may reach its statutory borrowing limit by mid-February and asked to raise the debt ceiling “as soon as possible.” Since then, Congress has been relatively idle on the issue.

On January 24th, the U.S. government went into technical default according to the government’s own debt watch website.

Economist Dr. Chris Martenson is sounding the klaxons and wondering why it hasn’t hit the financial press yet, saying “But the silence is all the more troubling because there is an unprecedented level of government borrowing on the books for 1Q06 with next 2 weeks (Feb 1st to Feb 9th) an especially busy period of time. An ambitious ~$70-$80b in Treasury paper will hit the market.” He suggests emergency congressional action may be needed to avoid a full-fledged default.

An earlier Bloomberg article states that covering the borrowing limit “would force the Treasury to use unusual measures such as shuffling money among government pension funds to finance operations.” Which is exactly what happened in February 2003 when the nation came close to default but borrowed against the $48 billion in the government pension fund. A passage from an old CNN article puts things in serious context:

Congress would be very unlikely to allow government finances to reach a point where there would be the possibility of an actual default on any part of the national debt, given the effect that would have on the government’s credit rating and future interest levels it would have to pay on its substantial debt.

Between now and whenever Congress finally notices that the government is in technical default, if the funds from shuffling money out of other investments run dry, it’s very likely the U.S. will move from technical default to active default.

However, raising the spending limit doesn’t address the root of the problem, which is that Republicans are just as big of spenders as Democrats, even worse. In contrast, Libertarians have long proposed a constitutional amendment to stop government deficit spending and require balanced budgets.

Update: just for clarity, a “technical default” is a financial jargon term to indicate violations of covenants, which while important (and in this case possibly historic), are not considered defaults in the traditional “not gonna pay the loan” sense.

Also, Kip had some excellent commentary:

The apologists want to have it both ways: they relentlessly highlight and cheerlead and I-told-you-so over the strength of the U.S. economy, but then conveniently forget that when an economy is strong, warning-sign statistics such as the federal budget deficit, the current account deficit, and the national debt ought to be, not “less doomsday,” but “non-doomsday.” A rip-roaring economy should be generating budget surpluses, current account surpluses, and a shrinking national debt. If, when we are doing our best economically, the warning lights are still blinking, then what are we to expect when the economy is not hitting on all cylinders?

I’m as big a fan of supply-side economics as anyone, and I do believe that it’s possibly to “grow your way” out of deficits and debt.

But only when the accelerator isn’t already hitting the floor.

Another Update: I got an email from Chris Martenson, who clarifies his profession and adds some new insight:

If by ‘economist’ you mean someone who has a PhD in the subject from a major university and who works at the world bank, no I do not qualify.

If you mean someone who has spent 5 years studying it with a passion bordering on obsession, I may qualify.

Certainly I took the requisite courses for my MBA, but I have found that the more important aspects that cover the philosophical underpinnings of operating under an unbacked fiat currency system were thoroughly untaught there or anywhere else in my schooling. Further, that Austrian economics, which I find the most intellectually complete and compelling branch, were never even mentioned.

Lately, I have been running an economic seminar series (four part) for my local community. They are free and well attended and cover the basics (what is money? debt? how much is there of each? trends. etc.) and are designed to simply present economic data and information that is relatively hard to come by in the US. The objective is to have people understand that we are facing the possibility of an economic tipping point and that the next 20 years are almost certainly not going to be like the past 20 years if only for demographic and energy related reasons.

So I guess you could say that economics is, in a way, my new profession.

About the technical default. I need to clarify that the Treasury Dept, through various accounting tricks, maintains that it remains under the statutory debt limit. If they didn’t, we’d be in full fledged default, no bones about it.

As such, and as long as the rest of DC goes along with that distinction (which they will), means that nothing will happen. We’ll float along right at the critical boundary and then Congress will pass a new debt ceiling when they must (and do it as quietly as possible).

That said, one possibility that I am keeping a very close eye on is what happens if that process actually stalls for a week or two?

What happens if next week or the week after, when the additional ~$75b of bills/notes/bonds *must* be floated to keep the government cash drawers from running bare, the debt ceiling is not yet passed?

We could see a delay of the bond auctions which could easily translate into a bit of uncertainty in the bond market itself. Should yields begin to climb as a result I would remain vigilant to the possibility of a significant stock market correction, a dollar decline, a bond market decline, or all three.

Given that there are now hundreds of trillions of dollars of derivatives perched atop the world economic systems, any reintroduction of actual risk into the stock/bond/currency markets could easily lead to some significant financial events. I consider this to be among the main reasons why DC figures it must, and will, the debt ceiling.

All the best,
Dr. Chris Martenson

  1. I blogged about this a while back, and remain indignant of course.

    But the use of the term “technical default” is misleading. A “default” is a failure to pay a debt at maturity. No such thing has happened with the national debt and will not happen. Temporarily going “over your limit” is not “default.”

    A shutdown of government operations is possible, of course. And, if absolutely necessary, the federal government could simply monetize the debt, with the resulting inflation.

    But a “default,” technical or otherwise, does not exist now and will not exist in the future.

  2. I’m not an economist, but there’s a “contract” is between the U.S. government and those holding the t-bills and t-bonds. It is a technical default because they are breaching the terms of the contract (by limiting deficit spending to a pre-set cap in the first place). This all gets into financial jargon that’s over my head, but the economist that I quoted is the one who initially called it that and he’s probably more up to speed on the accuracy of calling it a technical default.

  3. The point that everyone seems to be missing is that money has no value other than the dreamed up value assigned to ‘it’ by those that create money out of thin air in order to control others for profit. In simpler terms, the capitalist dream is the problem, NOT the solution.

    We should face facts. The entire capitalist monied CULTured social/political/economic/religious system is corrupt to its core and will remain that way until an entirely new monetary paradigm/policy is adopted.

    I believe the economic solution everyone seeks is contained in simple, viable, peaceful usury reform. In short, the construction of a two-tiered global economy where the primary marketplace is comprised of all in-common goods and services being usury-free coupled to a secondary marketplace comprised of all un-common goods and services being NOT usury-free. Both marketplaces will be seperate yet will work together to empower will The benefits of such a simplified structure are simply too profound to ignore.

  4. It’s not surprising to see that libertarians are (rightly) so concerned about the debt and deficit spending policies of the US Government. What’s surprising to me is that none of them seem to care (or perhaps to even know) that the LP itself is engaging in its own version of the deficit spending game, and that the LP is nearing a major financial crisis. There’s also no discussion anywhere that I can see about the nearly $100K in debt that the party can’t pay off, the out-of-balance, deficit-ridden budget that should have been released by the LNC by now (but hasn’t), and the impending (huge) FEC fine that is impending because our FEC filing expert (who is also teaching a course in the Libertarian Leadership School about FEC filings) can’t seem to correctly file an FEC report.

    Maybe we should start paying more attention to our own actions before we continue to criticize the USG.

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