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Debt Ceiling Kicks in, Treasury General Account Plunges: Let’s See How Close to Zero it Gets Before Congress Ends this Farce

OK, that was suddenly very fast.

By Wolf Richter for WOLF STREET.

The balance in the Treasury General Account (TGA), the checking account of the US government at the Federal Reserve Bank of New York, plunged by $116 billion in the latest week, to $390 billion, according to the Fed’s balance sheet, released this afternoon. Since mid-July, the balance has plunged by nearly half.

In the spring 2020, the Treasury Department issued $3 trillion in new debt to fund the stimulus and bailout programs, but didn’t spend it all. By July 2020, the TGA had $1.8 trillion sitting in it, up from around $300 billion before the pandemic.

In January, the Yellen Treasury said it would draw down the TGA from $1.6 trillion at the time to $500 billion by this summer. On August 1, the debt ceiling became effective, and the government now has to live off its checking account. And the TGA balance just plunged through the green line:

OK, folks, let’s get some popcorn and watch “The Debt Ceiling Farce 2021” as it unfolds. Everyone knows how this farce will end. Since 1960, the farce played 78 times. Each time, after everyone got through extorting concessions from the other side, Congress either raised the debt ceiling, extended it, suspended it, or changed the definition of “debt.”

So that’s how it ends. The day after, I’ll get to write one of my infamous post-debt ceiling articles with headlines like this: “Gross National Debt Spikes by $340 billion in One Day.” But that was in 2015. Now the amounts are much huger. Then I’ll get to follow up with something like, “US Gross National Debt Jumps by $1 trillion in 2 Weeks.”

During the debt-ceiling farce, the Treasury Department is allowed to use certain “extraordinary means” – more on those in a moment – to keep the government from defaulting. After the debt ceiling is lifted, new debt gets issued and those entities are made whole. In the end, everything gets caught up and nothing changes.

The suspense doesn’t lie in how it ends, because we know that, but how long they drag it out, and how close “we” get to the out-of-money day.

This time around, the out-of-money-day is in October or November, according to estimates by the Congressional Budget Office.

Back in early September 2017, just before the debt ceiling was lifted, the TGA had dropped to $39 billion. That’s awfully close, given how huge the US outlays are that have to be paid on a daily basis. So let’s see how close to zero we can get this time.

It’s a farce because Congress told the Administration to spend this money but then doesn’t allow the Administration to raise the money via debt sales to spend this money as Congress had told it to.

It’s just nuts, and foreigners scratch their heads every time, and so do we, but that’s how the system works.

The one thing the debt ceiling never ever does: reduce deficit spending. It just temporarily limits borrowing until default moves into view, and then the floodgates are opened again.

If Congress fails to extend the debt ceiling, the US government will default and will not be able to pay its bills, and financial markets around the world, which have never seen this kind of clusterf**k before, will crash, and every member of Congress, the richest of them on top, will lose half or more of their assets in no time.

And that’s exactly why this will never happen.

As of August 1, 2021, the gross national debt outstanding on July 31 became the debt ceiling: $28.43 trillion. And that’s where the debt now sits. The US government cannot add to it, but it can roll over its maturing debts.

On August 2, Yellen spelled out in her letter to Congress the first “extraordinary measures,” as they’re called, she will take to keep the US from defaulting, as authorized by law – initially raiding the contributions made by members of three big federal retirement systems:

  • The Civil Service Retirement and Disability Fund
  • The Postal Service Retiree Health Benefits Fund.
  • The Government Securities Investment Fund (G Fund) of the Thrift Savings Fund that are part of the Federal Employees’ Retirement System.

When that has reached the limits, Yellen will inform Congress of other “extraordinary measures” she will take.

The government has $390 billion in its TGA, and it can take some “extraordinary measures.” But it is burning a huge amount of money every day, and at some point, it needs to issue new debt, or it’s going to default.

We’re going to watch the TGA account get drawn down over this period. And let’s see how close it will get to zero before Congress votes to lift the debt ceiling. For sure, if it gets too close to zero, a 10,000-point drop by the Dow will motivate Congress to do anything, even lift the debt ceiling.

After which every entity that the government has wrung out will be made whole, and this process of making whole will of course trigger the infamous headline of mine that the Gross National Debt Spiked by $490 Billion or whatever in One Day.

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