US Hits Debt Limit Yet Again

On May 17, Treasury Secretary Jack Lew sent a letter to House Speaker John Boehner advising him that the federal government had once again reached the statutory debt ceiling, and that the Treasury would begin implementing “extraordinary measures” to allow the government to continue paying its bills.

Many Americans may not recall that the debt ceiling was suspended in January. Since then, the debt has gone up almost $400 billion to apprx. $16.85 trillion.

Secretary Lew said the Treasury would use the same extraordinary measures that it deployed during the last debt ceiling standoff.  Those include halting contributions to government worker retirement funds and drawing down some federal accounts (all of which would be made whole when the debt ceiling is raised).

Also on May 17, the Treasury stopped issuing State and Local Government Series securities (SLGS). State and local governments buy these securities as they work to refund municipal bond issues. Issuing those SLGS securities counts against the debt limit.

Lew noted that the Treasury is not able to provide a specific estimate of how long the extraordinary measures will last. But because of stronger than expected tax receipts and sequester spending cuts this year, he estimated the government could continue to pay its bills until after Labor Day.

He also confirmed that the Treasury will receive a dividend payment of $60 billion from mortgage giant Fannie Mae on June 28. Freddie Mac is also expected to make repayments to the government this year.

The Congressional Budget Office estimated in May that the budget deficit will be $642 billion for FY2013, some $200 billion less than previously estimated back in February. Because of increased revenue and payments from Fannie and Freddie, the CBO believes the Treasury may be able to stretch its extraordinary measures to October or November. We’ll see.

If the CBO’s estimate of a $642 billion deficit comes true, it will be the first deficit below $1 trillion since President Obama took office. At $642 billion, that represents apprx. 4% of GDP, as compared to the FY2009 deficit of $1.4 trillion, which was almost 10% of GDP. Here are the CBO’s latest budget deficit projections for the next 10 years:

The latest CBO estimates project an increase of $6.3 trillion in deficits over the next 10 years. Add that to the current national debt of apprx. $16.85 trillion, and we’re north of $23 trillion by 2023. While the latest CBO estimates are considerably smaller than its projections back in February, our debt trajectory is still unsustainable.

As always, these CBO estimates are based on some very questionable assumptions. In particular, they never include recessions. Do you believe we can add another $6.3 trillion in debt (or more) over the next 10 years without a recession? I didn’t think so!

In any event, we’ve once again hit the statutory debt limit, which the Treasury says it can stretch until at least Labor Day by way of “extraordinary measures.” The CBO thinks it can stretch it a little longer to October or November. Time will tell.

Sometime in that three-month window we will witness yet another debt ceiling battle in Washington, with the threat of another government shutdown. Only this time around, President Obama has already vowed that he will not negotiate with the Republicans. He says he will put nothing on the table (ie – no spending cuts).

He has said in the past that he wants to do away with the debt ceiling altogether, so I believe him when he says he won’t negotiate this time around. He simply does not have to since he’s not up for re-election. If that’s true, it will be a battle royale!

Enjoy the stock market ride while it lasts. And bonds… look out below!