A Debt Ceiling Crack-Up Is Coming. What’s Plan B?

Get ready for screaming headlines beginning in about two months. Why? Because the U.S. will be coming up on a double-deadline of debt and deficit inflection points.

The budget deficit issue will be hotly debated from March to next September and may result in a government shutdown at midnight on September 30, 2023, if progressive Democrats in the Senate and conservative Republicans in the House can’t agree on a budget for fiscal year 2024, which beings October 1, 2023.

But there’s another train wreck coming even sooner, as described in this article. This one involves the debt ceiling and the infamous “X-Date” when the U.S. could default on the national debt. What is the “debt ceiling?” It’s a numeric limit on the total debt that the U.S. Treasury is allowed to issue.

To be clear, the debt ceiling does not mean the Treasury cannot issue any new debt. It means that Treasury cannot issue debt that increases the total outstanding above the ceiling.

With $31 trillion of debt outstanding in maturities from four weeks to thirty years, there’s always some existing debt maturing. Treasury can issue new debt to pay off the old debt; it just can’t increase the total. So, if $20 billion of debt matures this week, Treasury can issue $20 billion of new debt to keep the total constant. They just can’t issue $30 billion without breaking the ceiling.

Treasury is at the ceiling now. The U.S. is still running deficits. How are the new deficits being financed if Treasury can only conduct the “rollover” operations described above? The Treasury has to resort to “extraordinary measures” to keep paying the bills.

You may have heard of the “Trillion Dollar Coin” idea. It won’t happen, but here’s how it works. The Treasury would ask the U.S. mint to produce a solid platinum coin. The Treasury would give the coin to the Federal Reserve and simply declare that the coin was worth $1 trillion. (Assuming a one-ounce coin, the actual market price is about $1,000).

The Fed would put the coin in a vault and credit the U.S. Treasury general account with $1 trillion. The Treasury could spend that newly printed money as it wished. The Treasury would not violate the debt ceiling because no new debt would be issued; the Fed would just create the dollars out of thin air. Easy breezy.

Of course, the Trillion Dollar Coin policy would be disastrous. The arbitrary valuation of the coin would show the true Ponzi nature of the Treasury market today. Fed efforts to supply the cash would radically increase the money supply and probably trigger more inflation.

The Fed and Treasury would be laughingstocks. That’s dangerous for two institutions that rely on public confidence to go about their business. Only the simpletons in financial media believe this idea is worth discussing, but it’s good to understand it because you will be hearing more about it.

How long can this shell game go on? No one knows exactly. There are estimates that are referred to as the “X-Date.” That’s the day the Treasury really does run out of cash and can’t pay bills or pay off Treasury note holders.

Right now, the X-Date is estimated to be around June 5, 2023, but even that is a guess. The real X-Date will depend on how much positive cash flow the Treasury generates during tax season around mid-April. As the day approaches, Democrats will scare voters with claims of debt default, lost Social Security payments, and lost benefits such as pre-K. Republicans will scare voters with claims of runaway deficits, higher interest rates, lost confidence in the dollar, and money printing as far as the eye can see.

We’ll have better estimates of the X-Date by April, and a kind of “countdown to default” will begin. Get ready for more volatility in stocks and higher interest rates.

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