We’re Not Going to Breach the Debt Ceiling

Here’s all you need to know about the debt ceiling:

  1. John Boehner knows how horrible it would be to breach the debt limit.
  2. John Boehner has the power to stop us from breaching it.
  3. John Boehner will not allow us to breach the debt ceiling.

It really is that simple, All of the talk around the debt limit is about how Boehner can sell a debt limit raise to his members in the best possible way. It has nothing to do whether he will actually raise it. This is even clearer today as Boehner and House Republican leaders have unveiled a new plan to increase the debt ceiling for a short period. There seem to be a couple of conditions on it – there’s no language yet so it’s unclear what exactly those will be. The White House reiterated as well today that it will only accept a clean debt ceiling increase, no conditions attached. Obama has correctly refused to negotiate over the debt ceiling and I’m confident that he will stick to his position.

As I’ve written before, Boehner could likely come to an agreement with Obama and Senate Democrats that raises the debt ceiling and passes a continuing resolution for a very minor concession (an agreement to negotiate on tax reform possibly). Obama will still stand firm in not negotiating over the debt limit, but a deal like that would be too good to pass up. He would basically receive a clean CR and clean debt ceiling raise for no substantial concessions. The problem for Boehner is not convincing Obama to accept such a deal. It’s convincing his caucus. That’s why he has spent the past ten days demanding that the White House negotiate while slowly ramping down his demands. It’s politicking.

The same thing is happening with this six-week debt ceiling increase. If we hit the debt ceiling deadline without an agreement over the government shutdown, Boehner will be forced to raise it without any concessions. That would be an embarrassing defeat and would infuriate the Tea Party. This short-term debt ceiling hike will give him another month and a half to prove to his conservative members that he’s doing everything in his power to fight the president. He has to come to an agreement over the budget while also raising the debt ceiling. This gives him more time to accomplish that.

Of course, he has to sell this six-week increase to his members as well. That’s why he’s including conditions on it. Without those, the Tea Party would be furious as well. But, as Greg Sargent reports, the White House isn’t going to agree to a short-term debt ceiling increase that’s tied to negotiations over the budget. That won’t happen. So, Boehner now has to rally support for a clean six-week raise that gives him more time to make a deal with the White House where he and Republicans get basically nothing. It’s a terrible position for the speaker to be in, but he doesn’t have a choice since he will not allow us to breach the debt ceiling. Boehner’s new plan just reinforces that message.

Can Treasury Prioritize Interest Payments?

Reuters Felix Salmon seems to think it can:

The problem with it is that the government would still need to miss an interest payment on its Treasury securities, and there’s no way that it’s ever going to do that, whatever happens to the debt ceiling.

Think about it this way: if I roll over my debts, then my total debt does not actually increase. So if a T-bill is coming due today, then the government can pay it off in full, and issue a new T-bill, without increasing its total indebtedness.

[W]ith Jack Lew (or anybody else, really) as Treasury secretary, you can be sure that debt service payments would be priority number one.

This only makes sense if the Treasury Department can choose which bills to pay and which not to. Imagine instead of just a T-bill is coming due today, there are millions of different payments coming in. Some are T-bills and the rest are made up by everything else the government pays for on a daily basis. When we breach the debt ceiling, the revenues coming in will not be enough to pay all of those bills. Salmon is suggesting that the federal government use those revenues to pay off all of the T-bills, freeing up more borrowing space and preventing the government from missing any payments. Treasury than could use the new borrowing space to pay off more of its bills, although it would still be unable to pay them all off. This is what conservatives mean when they say that the government can prioritize interest payments. This a pretty simple idea to make sure that the U.S. does not technically default on its debt, since defaulting requires missing an interest payment.

This plan assumes that Treasury has the technical capacity and legal authority to prioritize payments, though. If it cannot do that, then this entire idea falls apart. Treasury will pay whichever bills come in first. If a T-bill comes in when it has no more revenue and no more borrowing space, it would miss an interest payment. The U.S. government would default on its debt.

The question then is: can Treasury prioritize interest payments?

Implicit in Salmon’s piece is that it can, although he offers no evidence to support his belief. Back in 2011, he addressed the legality of prioritizing payments and came to the following conclusion:

As Treasury’s stated idea that it would simply pay bills as they came due, on a pari passu basis, and then stop paying when it ran out of money, it’s simply unthinkable. Treasury bonds and bills will get paid — they have to be. The bond markets know that, which is why they’re still pretty sanguine about this whole debt-ceiling issue.

Salmon seems to believe that there is absolutely no way Treasury would ever default on its obligations. Period. But while he offers a moderately convincing answer to whether prioritizing payments is legal, he doesn’t even try to answer whether Treasury has the technical ability to do so.

Last week, Slate’s Matt Yglesias and FT Alphaville’s Cardiff Garcia both pointed to an RBC Capital report that analyzed those technical abilities and concluded that Treasury wouldn’t be able to prioritize payments. Just today, a senior official at Treasury explicitly said that it “would be impossible to prioritize payments on debt.” Of course, the Treasury Department has every incentive to lie and convince Republican lawmakers that the department can do nothing if Congress doesn’t raise the debt ceiling. Nevertheless, it’s still meaningful.

That’s pretty good evidence to demonstrate that prioritizing debt payments is not possible. At the very least, it should make Salmon question his air-tight conviction that even if Congress refuses to raise the debt ceiling, Treasury has the technical capacity to ensure we don’t miss an interest payment. Given the evidence against it, that’s a big assumption to make.