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Purse Strings, the tale of two crises (UPDATED X3)

The “purse” of the U.S. is an account at the Federal Reserve (Fed) known at the Treasury’s General Account (TGA). And, like all bank accounts that purse has has two strings.

The first, called “Withdrawal,” is handed to Congress by Section 9 of Article 1 of the U.S. Constitution: “No money shall be drawn from the treasury, but in consequence of appropriations made by law …” Please be clear that an “appropriation” grants permission to withdraw money from the purse; it puts no money into the purse.

The second string, called “Deposit” is similarly handed to Congress by Section 8 of Article 1:

The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States …

To borrow money on the credit of the United States;

To coin money, regulate the value thereof …

Thus, Congress has three and only three ways to raise money to deposit into that purse: collecting revenue, borrowing money, and issuing (coining) money.

From time to time Congress temporarily delegates some control of these strings to the Treasury. Specifically:

  • Congress delegates highly restricted power to withdraw money from the purse by individually appropriating various expenditures — see UPDATE below.
  • Congress has delegated to the Treasury the power to collect the taxes and fees that Congress has authorized.
  • Congress delegates power to the Treasury to borrow money by raising the debt limit.
  • Congress has delegated power to coin (i.e., issue) cash to the Fed but requires the Fed to pay the U.S. Mint, a division of the Treasury, face value for coins.

Obviously, if Congress withholds the Treasury’s access to either string, the government stops paying it bills and shuts down.

The Treasury’s congressionally delegated authority to withdraw money from the purse expired on October 1, 2013, with the expiration of the 2013 budget. And, even if a temporary extension of the 2013 budget (Continuing Resolution) is passed allowing the Treasury to continue paying bills, unless the debt limit is also raised or the Mint deposits some coins into the TGA, no money can be deposited into the purse, which will be depleted in short order.

Unfortunately, the House of Representatives is under control of starve-the-beast conservatives, who do not want money to flow from the Treasury to the rest of government. And the White House is in the hands of a neoliberal austerity-loving, Rubinite deficit-hawk, who thinks we should “eat our peas,” “tighten our belts,” and save our entitlements by cutting them. The negotiations between these two factions of conservatism are at an impasse, and the potential for a deficit-cutting/beast-starving Grand Bargain are all too apparent. They, together, are dangling our government over the balcony and warning us what a calamity a default would be. Surely, to save our nation and the world’s economy, the American people will support a bipartisan accord that raises the retirement age a couple of years and cuts CPI adjustments to a more reasonable rate. /s

UPDATE: Per the Department of the Treasury:

The Federal Government’s current deficit and outstanding debt requirements are financed through borrowing (e.g., auctions of Treasury Bills, Notes, and Bonds). Funds paid to lenders for the use of their money is paid from the Interest on the Public Debt appropriation. This appropriation is permanent, indefinite, meaning that an annual appropriation request is not required to obtain this budget authority.

Interest on the Public Debt includes all interest paid on Treasury securities sold to the public (e.g., foreign and domestic financial institutions, individuals, insurance companies, state and local governments, etc.) and to Federal Government trust funds, revolving funds and deposit funds.

The significance of this is that the budget/shutdown crisis cannot cause a default. The debt-limit crisis could, in principle block the payment of interest on the public debt, but as a practical matter that won’t happen for a number of reasons:

  • Interest on the debt is $1 billion per day.
  • The Treasury has $7 billion per day coming in.
  • Mature bills and bonds can be rolled over with no impact on the debt.
  • The 14th Amendment seems to give priority to the debt.
  • Wall Street is mostly against defaulting. (I suspect that some have shorted everything and are praying for a default.)

UPDATE 2: Since either these strings can be used to strangle/starve the government and, as noted in the first UPDATE, interest on Treasury securities (bonds, bills, and notes) have a “permanent, indefinite appropriation” and are thus not subject to the budget-appropriation string but could get strangled by the debt-limit string, Wall Street seems to have told the starve-the-beast GOP to let go of the debt-limit string. Also, with their poll numbers plummeting, the GOP want cut their losses but still get some kind of face saving deal. So, it now looks like they are going to:

  • Cut a debt-limit deal
  • Continue the shutdown, i.e., refuse to pass a budget
  • Attack “entitlements” (Social Security and Medicare)

The irony of the attack on Social Security and Medicare is that they are off-budget items. Money for them does not go through the national purse, i.e., the TGA. They each have their own purses, called “trust funds.” And they each have their own tax streams which flow into those purses and get invested in special Treasury bonds that cannot be sold but can be cashed in with the Treasury whenever needed to cover on-going expenses, including benefits. So, what they contribute to the national debt is MONEY. They are not borrowers. Rather they are creditors, just like China, who have loaned trillions of dollars toward covering this nation’s deficits. But, now they are going to be attacked as sacrificial lambs offered up by Obama so that the GOP can claim that they got something for the suffering they’ve imposed by shutting the government down.

The attacks most commonly predicted are:

  • Raising the elgibility age for Social Security benefits
  • Shifting to chained CPI for cost-of-living adjustments
  • Means testing for Medicare benefits

The Obama White House have indicated their enthusiasm for cutting entitlements since four days before Obama’s 2009 inauguration.

UPDATE 3: Yesterday, Mother Jones published an article that contains some serious misimpressions, starting with its title:

16 Ways Default Will Totally Screw Americans
Economists say failure to raise the debt limit could lead to a financial apocalypse. Here’s what it might look like.
—By Dana Liebelson | Thu Oct. 10, 2013 7:50 AM PDT

First of all the “debt limit” is likely to be raised soon because it inconveniences Wall Street. Secondly, regardless of what Jack Lew says, unless he is totally incompetent, a default is the last thing that will happen for the reasons I enumerated above but repeat here:

  • Interest on the debt is $1 billion per day.
  • The Treasury has $7 billion per day coming in.
  • Mature bills and bonds can be rolled over with no impact on the debt.
  • The 14th Amendment seems to give priority to the debt. (But, it only says that the “validity of the debt … shall not be questions” and nothing about paying it.)
  • Wall Street is mostly against defaulting. (I suspect that some have shorted everything and are praying for a default.)

That said, the on-going consequences of the shutdown, due to lack of appropriations (i.e., permission to withdraw money from the Treasury) will be very, very bad.

But then the article goes on:

1. Social Security payments will be delayed, possibly cut. According to President Obama, in the event of a default the US government will have no choice but to delay Social Security checks. The government owes $12 billion in Social Security payments on October 23 and an additional $25 billion on November 1. At some point between October 22 and November 1, the BPC predicts that the US government will have exhausted its borrowing power and will either have to start severely delaying its bills or sort through the millions of different payments it makes each month—on everything from national parks to the FBI—to figure out which ones to stop paying. That’s when Social Security could see sustained cuts.


4. Medicare and Medicaid checks will be delayed, possibly cut. The US government owes $2 billion in Medicaid payments on October 30 and $18 billion in Medicare payments on November 1. Same deal: If the government runs out of cash before then, payments will be delayed, or put on the chopping block with everything else.

As I explained above, both of these program are “off budget” and have very large trust funds that are unaffected by the shutdown and projected to last for more than a decade. They do not depend on the “cash” in the government’s purse, i.e., the credit in the TGA. Only extreme incompetence could cause a near-term lapse in the payment of benefits, despite absurd warnings from Jack Lew and Barack Obama.

All of this raise questions about journalists responsibility to know what they are talking about; we saw where NYT and Judy Miller got us by pitching White House shit in the run up to the invasion of Iraq. Here, the consequences of the on-going shutdown will be horrible, but there’s a default and missed SS and Medicare payments should be the least of our worries at this time. Rather, unnecessary long-term cuts to those benefits by deficit hawks in the White House and starve-the-beast Republicans in the House are the key danger.

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