Debt Ceiling Discussion Going Over Your Head? We Can Help.

With so much talk currently about the statutory debt ceiling, we at CRFB felt that this topic, which can be quite complex, deserved a good briefing. We have thus updated our Debt Celing Primer as an educational tool. With the debt ceiling debate about to reach full force as we get closer to reaching the limit, an explanation of what the debt ceiling truly is can be helpful.

This primer, which explains the the issue succinctly, yet without the sound-bites, describes what the debt ceiling is, why it was established, how much it has grown over time, what happens if the ceiling is breached, what Treasury can do to avoid default and what policymakers should do.

Of course, Washington has a way of complicating things. The Department of Treasury can use a variety of accounting gimmicks to postpone hitting the threshold. The tactics available to the Treasury include:

• Suspending the reinvestment of government securities in federal trust funds – such as the Civil Service fund and the G-Fund for federal employees’ Thrift Saving Plan – in order to prevent the growth of intragovernmental debt.
• Suspending the investment of the Civil Service Retirement and Disability Fund.
• Delaying or suspending the auction of Treasury securities, which would prevent the growth of debt held. Before doing this the Secretary must determine that a “debt issuance suspension period exists,” which basically means the Secretary has determined that the obligations of the U.S. cannot be issued without exceeding the debt limit, and allows the Treasury to suspend or redeem investments in two trust funds to help provide funds for government operations during this period.
• Redeeming government securities held in the Civil Service Retirement and Disability Fund.
• Redeeming the securities of other trust funds at an earlier date than they would otherwise be redeemed.
• Ceasing to provide state and local governments with non-negotiable U.S. federal debt for escrow accounts.
• Selling part of dollar holdings on the Exchange Stabilization Fund.
• Selling holdings in Fannie Mae and Freddie Mac debt and stock, or assets held by the Treasury through the TARP program.

A forthcoming CRFB paper will examine the issue more in-depth. In the meantine, see our Debt Ceiling Primer here.