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Debt Ceiling: What Really Changes on August 3?

On May 16, 2011, Tim Geithner sent the following to Reid, Boehner, Pelosi, and McConnell:

I am writing to notify you, as required under 5 U.S.C. § 8348(l)(2), of my determination that, by reason of the statutory debt limit, I will be unable to invest fully the portion of the Civil Service Retirement and Disability Fund (“CSRDF”) not immediately required to pay beneficiaries. For purposes of this statute, I have determined that a “debt issuance suspension period” will begin today, May 16, 2011, and last until August 2, 2011, when the Department of the Treasury projects that the borrowing authority of the United States will be exhausted. During this “debt issuance suspension period,” the Treasury Department will suspend additional investments of amounts credited to, and redeem a portion of the investments held by, the CSRDF, as authorized by law.

In addition, I am notifying you, as required under 5 U.S.C. § 8438(h)(2), of my determination that, by reason of the statutory debt limit, I will be unable to invest fully the Government Securities Investment Fund (“G Fund”) of the Federal Employees’ Retirement System in interest-bearing securities of the United States, beginning today, May 16, 2011. The statute governing G Fund investments expressly authorizes the Secretary of the Treasury to suspend investment of the G Fund to avoid breaching the statutory debt limit.

Each of these actions has been taken in the past by my predecessors during previous debt limit impasses. By law, the CSRDF and G Funds will be made whole once the debt limit is increased. Federal retirees and employees will be unaffected by these actions.

I have written to Congress on previous occasions regarding the importance of timely action to increase the debt limit in order to protect the full faith and credit of the United States and avoid catastrophic economic consequences for citizens. I again urge Congress to act to increase the statutory debt limit as soon as possible.

Sincerely,

Timothy F. Geithner

What this means is that the debts that the U.S. Treasury owes to the Civil Service Retirement and Disability Fund and to the Government Securities Investment Fund of the Federal Employees' Retirement System are no longer Treasury bonds, notes, and bills (which are included in the "debt subject to limit"). They are, instead, simply unpaid debts of the U.S. Treasury (which are not included in the "debt subject to limit").

What is and has always been unclear to me is what Geithner's claim that the "borrowing authority of the United States will be exhausted" on August 2 means.

It seems to me that the borrowing authority of the United States was exhausted on May 16. On May 16 the Managing Trustee of the CSRDF and of the GSIF (who is the Secretary of the Treasury) attempted to buy Treasury bonds with the federal employees' contributions to the funds and found that he could not do so--that the Secretary of the Treasury did not have authority to issue the bonds. H

The Secretary of the Treasury then declared a debt issuance suspension period.

The Secretary of the Treasury then took the cash and deposited the cash into the Treasury's main account as if he had issued bonds and had authority to borrow the money from the CSRDF and the GSIF, citing as explicit statutory authorization 5USC§1848, which explicitly allows him to do so when the borrowing authority of the United States Treasury has been exhausted.

The Managing Trustee of the CSRDF and of the GSIF (who is the Secretary of the Treasury) did not object.

So what changes on August 3? And what happens on August 3?

It is not the case that the borrowing authority of the United States is newly exhausted on August 3--the borrowing authority was exhausted on May 16. What happens on August 3 is that the CSRDF and GSIF fund balances hit zero--that the Secretary of the Treasury will have to do something more than breach his fiduciary duty to the investors of the CSRDF and GSIF while relying on 5USC§8438 as authority for this breach.

Thus it seems to me that on August 3 the Treasury Secretary must decide whether to:

  • Breach his constitutional duty to repay bondholders (and be subject to suit).
  • Breach his constitutional duty to pay government contractors duly appropriated and authorized funds (and be subject to suit).
  • Disinvest some other government trust fund than the CSRDF and the GSIF of which the Secretary of the Treasury is also Managing Trustee (and to do so without the safe harbor of 5USC§1848, but Roberts would have to work very, very hard indeed and break a great deal of precedent in order to give anybody standing to file suit).
  • Mint a large platinum or palladium coin and use it to buy back some Treasury debt.
  • Persuade some other actor (the IMF? The government of China?) to make a big wire transfer to the Treasury's cash account in return not for a U.S. Treasury bond but for a handwritten IOU of or simply the handshake of the Treasury Secretary.

Anybody have a better idea of what the options are?

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