“The debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a limit on the ability to pay obligations already incurred”. –The General Accounting Office (GAO-11-203, February 23, 2011)
Late this morning, House Majority Leader Steny Hoyer updated floor schedules for fiscal policy votes this month. As expected, the body will vote September 27 on the Senate-passed infrastructure bill. He also announced the House of Representatives will vote on a debt limit adjustment next week. While constructive news, House debt limit votes are not the source of anxiety over this archaic fiscal accounting tool. The Senate owns all the debt limit drama. We remain strongly of the mind that the US will once again avoid defaulting for the first time in the republic’s history
Beginning in 1917, Congress began asserting tighter control over the Executive’s issuance of debt by voting on increases as individual legislation necessitated. In 1939, Congress instituted a more manageable and less burdensome system of setting specific dollar limits on debt held by the public. Since then, Congress has controlled the Treasury Department’s ability to pay interest or incur new debt by setting a dollar cap or date expiration of authority to borrow. All of which makes sense as only Congress can obligate US federal expenditures and taxation.
There is only one way to authorize new borrowing once the date or cap is reached: Congress must vote to either further suspend the limit to a new date certain, or it must approve a dollar figure to accommodate new debt issuance. In the 1935 Perry v US case the Supreme Court found that Article I, Section 8 makes clear only the legislature can authorize changes to federal debt levels. Neither the courts nor the president have a role by any means to adjust the debt ceiling. Once the Treasury is locked out of debt markets, it has only daily cash receipts to manage the books. Those flows are erratic day-over-day, denying anyone knowledge of what cash balances would be at any moment.
All manner of schemes to avoid debt limit crisis are revisited every time we approach a debt ceiling standoff. None are worthy of deep contemplation. Treasury secretaries of both parties over at least the last 40 years have held fast that they do not have authority to prioritize which legal obligations of the federal government they can honor. The politics of such a move would consume every lawmaker, but the larger effect would be felt via the courts as those owed payments, submitted or not, would litigate their place in line. This scenario likely would produce little more than urgent reiteration of Perry, and avoidable hardship on many households and small businesses.
Politics and litigation prospects aside, the picture of the US going through such torture merely to honor its willfully incurred obligations would shake markets to say the least. In July 2011, business and consumer sentiment survey cratered, intensifying a drop off begun in late spring. VIX readings rose over 90% in the last ten days of July into August 2nd. Spreads widened for fixed income assets. That 2011 summer drama imposed costs on most market participants and household borrowers before Congress ended the futile pain.
Back to the Future
Hoyer’s announcement very likely means all attention turns to the Senate by this time next week. Senator Ted Cruz’s (R-TX) earlier this week said that he would force 60 senators to modify the debt limit. Barring new developments soon, Democrats must go back to the Budget Committee and amend their FY22 resolution to allow a new debt limit included in reconciliation, which requires only a simple majority on the floor. Cruz and others hope to force politically unfavorable votes on the 48 Democrats and two Independents presumably willing to vote for reconciliation, including a new debt limit. Senate Minority Leader Mitch McConnell earlier this week supported Cruz’s stance that members of the Senate Democratic Caucus alone would have to accommodate new borrowing authority.
Treasury Secretary Janet Yellen last week tightened her language indicating when Treasury would run out of cap room and cash to rollover debt, pay interest, and continue paying bills. She has not put a date specific on it yet but that is the next move. She did change previous language of “late-October to early November” to simply “late October”.
This morning, the White House reportedly released a fact sheet to state governments updating them on action Treasury will take to avoid disruptions. Having not seen it but having seen plenty in previous years, the document likely also softly begins telling them how to prepare in the event action to modify the debt limit does not come until the very end of October.
Another loud public shoe to drop (if the intrigue continues) will be a communication from Treasury instructing the Fed to alert the hundreds of financial institutions participating in the multiple federal payments system a date to stop processing payments to vendors owed money from the federal government. If 2011 is a guide, this step will get everyone’s attention, especially members of Congress.
The US has never failed to pay its debts and the Perry case underscored those obligations live until fulfilled. We continue to believe it’s a matter of when and under what circumstances Congress will authorize the Treasury to manage the country’s fiscal affairs. Between now and then, lawmakers will negotiate the timing and means of that development. All of which will call into question the validity of the US established global risk-free rate and the sensibility of America’s management of the world’s reserve currency.
In the growing tempest of uncertainty, one aspect of debt limit drama is undeniable – only Congress can make this end. There is no public polling available to suggest American voters like or understand debt limit drama. In 2013, Cruz led the last Senate GOP effort to create political leverage from the mundanity of paying federal bills. The debacle damaged Republicans brand a year out from midterm elections. The abysmal technological rollout of Obamacare was the only factor protecting his colleagues from November 2014 fiscalamity pain.
