Officials would forecast future bond interest and principal cash flows and pay bondholders before paying (some of) the nation’s other bills. Where needed, they would hold back a cushion to ensure that they could definitely make any future bond payment. In other words, a debt ceiling impasse doesn’t mean a default on Treasury bonds.
No Treasury secretary is ever going to emphasise this debt prioritisation, since it reduces pressure on Congress to raise the debt limit. Moreover, prioritisation sets a very poor precedent, and not just because of the optics of paying bondholders (including foreign nations) over US citizens and businesses.
The approach hasn’t ever been tested and would be operationally complex. In a normal month, Treasury makes thousands and thousands of payments, big and small. And government officials would almost certainly have to hold back more cash than strictly necessary, in order to take no chance on bond payments. This in turn means a sharp, sudden and brutal cuts to all other government spending.
Consider August, which is when the drop-dead date is most likely to be hit. 2019 is a good baseline, since cash flows in 2020 to 2022 were affected first by the pandemic and then by fiscal stimulus. If August 2023 follows the path of August 2019, Treasury will have roughly $200bn in cash inflows and $400bn in cash outflows. But only a small amount of the outlays will be needed for bond payments. Treasury will pay those over the month, hold some back during the process and spend the rest of the $200bn it receives. That means at least $200bn in government spending will suddenly be cut off until the debt ceiling is raised.
Economically, that could be a massive blow. But even here, there is a nuance. Remember, this is spending to which the US government has already committed. This means that the minute the debt ceiling is eventually raised, this money has to be spent — no ifs and buts. That certainty will lessen the initial economic shock.
Say there’s a small business that is about to get a payment from the government. If the money doesn’t come through on the correct date, the business owner is unlikely to panic. He or she will believe that it’s only a matter of time before the government does make good on its bills.
Alright, yeah, OK and maybe.
Except, what’s another name for an increase in unpaid bills?
So, it could be argued that the moment the debt limit is reached the US govt has to stop all spending on everything. Without accruals or whatever – it must contract no new debt at all.
And wouldn’t that be fun if the argument could be successfully used?