Tag Archive for: DebtCeiling

A Debt Ceiling Saga: Americans Devour Their Marshmallows

Estimated Reading Time: 4 minutes

The debt ceiling agreement brings to mind the famous Stanford marshmallow experiment in deferred gratification.


In 1972, an experiment in deferred gratification was conducted at Stanford Univ.  Children were given the choice of eating one marshmallow immediately or waiting a period of time for two marshmallows.  When the test subjects were followed later in life, it was determined that those who had not deferred gratification were less successful as adults.

Does the same happen with nations?  Are nations less successful if they don’t defer gratification and live within their means?

Well, the United States is in the middle of a decades-long experiment to determine the answer, and preliminary findings suggest that the answer is yes.

The recent debt ceiling agreement supports the findings.

Loons on talk radio are squawking that House Speaker Kevin McCarthy caved on the deal, although he struck the best deal possible given political realities.  Loons in the left media are squawking that the cuts are too deep, although they are about as deep as the bone-dry Rillito River in my hometown of Tucson.

Trump acolytes are claiming that their idol had the economy in tip-top shape, conveniently forgetting that he had increased deficit spending by a trillion dollars and was a proponent of easy money.

Acolytes of Joe Biden, Bernie Sanders, Elizabeth Warren, and Alexandria Ocasio-Cortez are claiming that too little is spent on the poor.  They conveniently overlook the fact that when entitlements, welfare, and tax credits are counted as income, the bottom fifth of Americans actually have more income than the next fifth and nearly as much income as the fifth after that.

Karl Marx said that religion is the opiate of the masses.  Well, debt is the opiate of Americans.

Federal debt is currently a staggering 97% of GDP.  To put that in perspective, imagine if your personal debt were 97% of your income.

Without the debt ceiling agreement, the federal debt was projected to be 119% of GDP in a decade.  With the agreement, it is projected to be 115%, assuming that the agreement holds.  Yeah, that’ll make a difference.

In terms of annual deficits, the agreement will mean that the deficit will be 4.6% of GDP in the year 2025.  Without the agreement, it would’ve been 5%.  Either way, that will keep the U.S. as a leader in deficits among Western countries with advanced economies.  For example, the table below shows the projected 2025 deficit as a percentage of GDP for selected countries.


U.S. without Debt Ceiling Agreement 5.0%
U.S. with Debt Ceiling Agreement 4.6%
Spain 4.3%
France 3.5%
United Kingdom 3.3%
Australia 3.1%
Japan 2.3%
Italy 2.0%
The Netherlands 0.3%

Source:  “A Debt Deal That Doesn’t Deal with Debt,” by Greg IP, the Wall Street Journal, June 1, 2023.

No wonder 60% of Americans are overweight and 30% are obese.  They gorge on marshmallows.

All but 15% of federal spending was taken off the table in the negotiations over the debt ceiling.  Taken off the table were Social Security, Medicare, Defense, veterans’ benefits, interest on the debt, and taxes.  Only nondefense discretionary spending was left on the table.

This was akin to a debt-ridden family trying to avoid bankruptcy by cutting back on restaurant meals while taking out a 72-month loan to buy a $60,000 pickup truck.

When did Americans lose that gizmo in their forehead that controls impulsiveness?  Was it when TV commercials went from six an hour to over 30 an hour?  Was it when the virus of social media killed brain cells?  Was it when the Federal Reserve gave up on its founding mission of sound money in order to enable the government, and thus the people, to spend beyond their means?  Or was it when frugality went out the window with women buying new jeans with rips in the knees?

There is no doubt about one development:  The more Americans with college degrees, the less common sense, the less understanding of economics, and the less financial savvy.  Colleges like it this way because it allows them to gouge students and to burden them with tuition loans while pretending to care about social justice.

Meanwhile, productivity has flat-lined in spite of new technology—or maybe because of new technology.  Another possible explanation for the flat-lining is the new cultural norm of time off being more valuable than work. Still, another is the ever-increasing share of the workforce devoted to handling government red tape.

Paradoxes abound.  On the one hand, spending by city, state, and national governments has shot up over the decades like a Space X rocket.  The same for public schools.  On the other hand, serious social and economic problems seem to be getting worse. 

Homeless people are living and dying on the streets like animals in many American cities.  A record number of Americans are dying of drug overdoses.  Suicides and attempted suicides are on the rise among teens.  Murders, drive-by shootings, car thefts, shoplifting, and general marauding have become cultural norms in some cities and hoods.  K-12 test scores are a national embarrassment, especially among blacks, Hispanics, and working-class and rural whites.  Sports gambling is a growth industry.  Degenerates and dumbbells have risen to the top of sports, entertainment, and politics, where they have become role models for American youth.  Under the guise of diversity, equity, and inclusion, old forms of racism and exclusion have been replaced by new forms of racism and exclusion.  And chest-thumping Americans whose pride is hurt by China’s success are beating war drums, not realizing that a war with China would be suicidal.

And while all this is happening, America’s institutions are preoccupied and even obsessed with gender and sexual orientation, as if genitals are so important that they should be shoved in everyone’s face.

Woe to anyone who suggests that the decline in two-parent families and responsible parenthood might be a root cause of many of America’s socioeconomic problems.  That’s a surefire way of being typecast and ridiculed as a born-again Christian, a right-wing reactionary, a simpleton, or, the strangest accusation of all, someone with white values. 

That’s particularly strange in view of the fact that East Indians have the highest household income in the U.S. and also have high rates of marriage and low rates of divorce.  Unsurprisingly, Indian households are 50% more likely to be headed by a married couple than the average for all American households.

Or maybe their success is due to disliking marshmallows.

Weekend Read: Everything You’ve Heard About the Debt Limit is Wrong

Estimated Reading Time: 10 minutes


Contrary to widespread claims that the U.S. government will default on its debt if Congress doesn’t raise the debt limit, federal law and the Constitution require the Treasury to pay the debt, and it has ample tax revenues to do this.

Nor would Social Security benefits be affected by a debt limit stalemate unless President Biden illegally diverts Social Security revenues to other programs.

The debt limit is a valuable tool for transparency, accountability, and giving voters an ongoing say in how their money is spent.

The Debt Situation

The U.S. national debt has grown by $8.2 trillion since 2020 and is now $31.5 trillion. This is an average debt of $239,763 for every home in the nation.

Those figures don’t account for the government’s fiscal liabilities and unfunded obligations. When these are included—as government requires in the financial statements of publicly traded corporations—the total federal shortfall is $135 trillion. This is an average burden of more than $1 million per household.

In addition, Biden has proposed a budget framework that will allow the national debt to grow over the next decade by $19.8 trillion, according to his own administration’s projections.

Such levels of red ink have perilous consequences for nearly everyone, like higher inflation, wage stagnation, investment losses, and lower standards of living.

To limit the damage from excessive government debt, House Republicans have passed a bill that would reduce budget deficits by about $4.8 trillion over the next 10 years. This isn’t enough savings to actually pay down the debt but would restrain its growth by about 25% relative to Biden’s agenda. The bill accomplishes this mainly by reducing spending on social programs and “green” energy subsidies.

Biden and the Senate Democrats have said they won’t approve the bill or anything like it. However, they are under pressure to negotiate because the federal government is spending about 22% more than its revenues and has reached the legal limit of its ability to borrow more money. This is called the “debt ceiling” or “debt limit,” a provision of federal law by which Congress exercises its constitutional power to “borrow money on the credit of the United States.”

Biden and the Democrats raised the debt limit by $2.5 trillion in December 2021 when they controlled both the House and the Senate. The Republican bill increases the debt limit by another $1.5 trillion, but in opposition to the Democrats’ stance, Republicans have said they won’t raise the debt limit without including deficit-reducing provisions in the same bill.

The Biden administration has some ability to skirt the debt limit by using “extraordinary measures,” which basically involve shuffling money around. However, these measures are nearly exhausted.

So unless Democrats and Republicans agree on a bill to raise the debt limit within about one month, the federal government will have to cut enough spending to completely stop the growth of the national debt. Or in other words, it will have to operate with a balanced budget.

The “Default” Farce

The U.S. Treasury—which is responsible for managing the national debt—is part of the executive branch of the federal government, which is under the authority of President Biden.

Biden alleges that unless the debt ceiling is raised, the government will “default on its debt” for the “first time” in the history of United States. A default is a “failure to meet a financial obligation,” particularly paying a debt.

In concert with Biden, scores of media outlets—such as PoliticoNPRCNNNBC, the New York Times, and the Washington Post—have reported that not raising the debt limit could cause the government to default on its debt.

In reality, however, federal law requires the Treasury to pay the debt, and the federal government has ample revenues to do so. So if there is a default, it will only be because the Biden administration breaks the law.

The federal law that governs the repayment of the national debt states:

(a) The faith of the United States Government is pledged to pay, in legal tender, principal and interest on the obligations of the Government issued under this chapter.

(b) The Secretary of the Treasury shall pay interest due or accrued on the public debt.

The phrases “pledged to pay” and “shall pay” are definitive, unlike discretionary government programs for which money is “appropriated” and is sometimes not even spent.

Moreover, the federal government collected $5.1 trillion of revenues in 2022, while interest on the debt was $775 billion, or roughly 15% of revenues. This reveals that the federal government has plenty of money to service its debt and trillions more for other expenses.

The federal law that requires payment of the debt reinforces the 14th Amendment to the Constitution, which states: “The validity of the public debt of the United States … shall not be questioned.”

Yet in response to a question about the 14th Amendment, Biden press secretary Karine Jean-Pierre claimed that Congress has a “constitutional duty” to raise the debt limit. This turns the plain meaning of the amendment on its head. The 14th Amendment requires the government to honor its existing debt, not to continually take on more debt. It is Biden, not Congress, who is threatening to shirk his constitutional duty to pay the debt unless Congress lets him borrow more money.

Explaining the obvious while debunking tortured legal theories about the debt limit and the 14th Amendment, Michael W. McConnell, the director of the Constitutional Law Center at Stanford Law School, writes:

If Section Four [of the 14th Amendment] has any relevance to the debate, it means that the President is under a constitutional, as well as a pragmatic, obligation to keep current on interest and principal, rather than continuing other spending with a mere statutory basis.

In short, an actual default can only occur if the President disregards a federal law that supports the Constitution he has sworn to uphold.

Prioritizing Spending

Without presenting any evidence to support their claims, some organizations and individuals have asserted that the Treasury doesn’t have the legal authority to prioritize paying the debt before other expenses in the event of debt limit impasse.

Some examples include the Center on Budget and Policy Priorities, columnist Jamelle Bouie, and Max Baucus a former U.S. Senator from Montana who is now Biden’s ambassador to China. During a floor speech in the Senate, Baucus declared:

The Treasury has no legal authority to prioritize spending and pay only the most important bills.

Baucus’ statement is in conflict with “the supreme law of the land,” otherwise known as the U.S. Constitution. As documented by Ph.D. David Upham, the Director of Legal Studies at the University of Dallas, the Constitution explicitly requires federal officials to perform specific functions like:

  • the President’s duty to “take Care that the Laws be faithfully executed” and to “preserve, protect and defend the Constitution.”
  • Congress’ duty to “assemble at least once in every Year.”
  • the entire government’s duty to “guarantee to every State in this Union a Republican Form of Government” and “protect each of them against Invasion.”
  • the duty to honor “the public debt of the United States, authorized by law, including debts incurred for payment of pensions….”

Since all of these constitutional “duties to act involve a duty to spend money,” writes Upham, the government is required to “prioritize” spending on them if the debt limit is maxed out.

Likewise, liberal icon and Harvard law professor Laurence Tribe explained during an Obama-era debt limit standoff that the president:

  • “must prioritize expenditures” and “some payments simply have to be postponed until the Treasury has enough money to make them.”
  • isn’t “free to use whatever priorities he likes” but must prioritize spending on constitutional mandates, like “payments on the public debt” and “the payment of judicial salaries.”

This past Sunday, the New York Times published an op-ed by Tribe in which he pulls a 180 on this issue and declares “I changed my mind” and Biden can order the Treasury to “borrow more than Congress has said it can.” He admits that this would require the president to ignore the debt limit law but argues that:

  • the president would otherwise have to ignore “all the spending laws Congress has enacted.”
  • this course of action would “give the president a lot less power than entrusting him to decide which of the government’s promises to honor and which creditors to stiff—a power that the Supreme Court denied him when it handed down a 1998 decision that prevented him from vetoing line items within a budget.”

However, Tribe himself dismantled those very same arguments in a 2011 essay, and his Times op-ed rebuts none of the points he raised. These include but are not limited to the following:

  • “Spending laws” don’t “empower the government to raise the revenues to be spent.”
  • The “Constitution allocates” the power to raise revenues to “Congress rather than to the President.”
  • Issuing debt is one of the ways government raises revenues, and the President can’t do that by himself, just as he can’t impose taxes by himself.
  • “As far as I am aware, no President of the United States has ever attempted to raise revenue without congressional authorization.”
  • In contrast, “Ulysses Grant, Franklin D. Roosevelt, Harry Truman, and Richard Nixon all declined to spend money that Congress had appropriated.”

In his recent backflip, Tribe also claims that “ignoring” the debt limit wouldn’t “represent a dangerous step in a tyrannical direction.” This is at odds with emails he sent to a high-ranking Treasury official in 2011. In this exchange, Tribe addressed the possibility of Obama using the same justification Tribe endorsed in his 2023 Times’ op-ed and wrote that it would set “a genuinely dangerous precedent of ignoring the rule of law.”

Yes, They Can

Another excuse as to why the federal government can’t prioritize spending on the debt is that the Treasury is incapable of doing this. According to a Treasury Inspector General report during the Obama administration, the Treasury “makes more than 80 million payments per month,” and “Treasury officials determined that there is no fair or sensible way to pick and choose among the many bills that come due every day.”

That claim proved to be false when congressional subpoenas forced the Obama administration to produce documents which revealed that the Treasury:

  • was “technologically capable” of prioritizing payments on the debt.
  • was running “debt ceiling exercises regarding these sorts of contingencies” since 2011.
  • “was planning to prioritize payments during the debt limit impasses of 2013.”
  • hid these facts “to maximize pressure on Congress” so they would cave to Obama’s “position that any increase in the debt ceiling not be accompanied by spending constraints.”

Beyond those revelations, investigations of this affair yielded admissions that the President is responsible for deciding what gets paid and what does not.

During a congressional hearing, Obama Treasury Secretary Jack Lew was asked if he would “permit a missed payment on a U.S. Treasury security obligation,” and he replied, “It is actually not my decision. It is something that the President would have to decide.”

Likewise, the Treasury Inspector General concluded: “Ultimately, the decision of how Treasury would have operated if the U.S. had exhausted its borrowing authority would have been made by the President in consultation with the Secretary of the Treasury.”

Biden maintains that if Republicans don’t go along with his plan to raise the debt limit, they will force the government to default on its debt and to cut payments for popular government programs like Social Security. In reality, these actions would be Biden’s choice alone.

Social Security Payments

Beyond Biden—organizations and people like CNNNancy Pelosi, and NBC News say that not raising the debt limit may cut or stop Social Security payments.

Such an event cannot happen unless Biden unlawfully diverts Social Security revenues to other programs. The finances of the Social Security program are legally separated from the rest of the federal government, making it illegal to spend Social Security taxes on any program other than Social Security. Furthermore, the 2022 Social Security Trustees Report states:

The Social Security Act prohibits payments from the OASI [Old-Age & Survivors Insurance] and DI [Disability Insurance] Trust Funds for any purpose not related to the payment of benefits or administrative costs for the OASDI [Social Security] program.

The fact above also explodes the common myth that the Social Security Trust Fund has been “looted.” Such “looting” is actually a law (established in the original Social Security Act of 1935) that requires the Social Security program to loan all surpluses to the federal government. The government is required to pay back this money with interest, it has never failed to do so, and it has been doing this since 2010.

Social Security Trust Fund assets are comprised entirely of federal government debt. The Treasury’s obligation to pay the interest and principle on this debt is covered by the same law that requires it to pay for all other debt.

As such, Professor McConnell writes, “Social Security payments are not jeopardized by hitting the ceiling.” However, they could be jeopardized by a president who violates the law.

Transparency and Accountability

According to Cal Berkeley professor Robert Reich, the debt ceiling “serves absolutely no purpose” and should be abolished. Likewise, the New York Times editorial board claims the debt limit “has not served a useful purpose in living memory.”

Just the opposite, the debt limit serves several purposes, two of the most important being transparency and accountability.

Politicians routinely enact thousands of pages of complex laws with rhetoric about saving money, cutting the deficit, and investing in America. Joe Biden’s Twitter feed is heavily laced with such statements.

Yet contrary to his talk of fiscal responsibility, Biden and the Democrats raised the debt ceiling by $2.5 trillion less than a year and half ago and are now pushing to raise it again. Such votes provide public visibility into the actual state of federal finances and who is driving it deeper into debt.

Without debt limit votes, people like Hakeem Jeffries, leader of the House Democrats, can easily pull the wool over voters’ eyes with claims like this: “President Biden and House Dems have cut the deficit by $1.7 trillion over the last two years.” In reality, their actions increased federal deficits by about $840 billion over that period, but understanding this takes knowledge of the following details:

  • When Biden entered office, the Congressional Budget Office was projecting deficits would decline by $2.95 trillion in 2021 and 2022 due to the expiration of pandemic spending.
  • Instead, deficits fell by just $2.11 trillion mainly because Dems increased spending on wide-ranging social welfare programs and bailouts for state/local governments and private union pension funds.
  • Consequently, Democrats increased the deficits by $840 billion relative to what would have happened if they kept the status quo.
  • From the time that Congress enacted Biden’s first major economic proposal through 2022, the national debt grew by $3.5 trillion.

Votes to raise the debt limit are obvious and give voters information to hold politicians accountable. That said, they could still be twisted by unscrupulous journalists and activists. One way to do this would be to blame a party for voting to increase the limit while failing to mention that their opponents voted against the bill because they wanted to increase the limit even more.

The Buck Stops Here

Another important purpose of the debt limit is to prevent previous presidents and congresses from racking up bills while forcing future presidents and congresses to pick up the tab.

For a recent example, one month before Republicans took control of the House in January 2023, a lame-duck Congress and Biden passed an omnibus spending bill that spends $1.7 trillion and spans 4,155-pages. Democrat Rosa DeLauro of CT called it the greatest increase in “non-defense funding ever” and boasted that it “fulfills 98% of Democratic Member requests in the House.” The politicians who voted for this could have raised the debt limit in the same bill, but instead, they left that to the new Congress while saddling it with all of the spending they passed.

On a much larger scale, previous congresses and presidents have enacted large mandatory programs with perpetual authority to spend money, like Medicare, Medicaid, Food Stamps, and other social programs. The share of the federal budget consumed by these programs has grown from about 30% in the early 1970s to more than 60% today.

Mandatory programs have become such an engrained part of government spending that politicians sometimes ignore these outlays when speaking about the federal budget.

The debt limit gives voters and lawmakers a measure of control over the spending that occurs under their watch, even if they don’t simultaneously control both houses of Congress and the presidency.

A common talking point of people who want to violate or eliminate the debt ceiling is that “Congress has already voted to spend this money” and not spending it would be “breaking promises.” What they fail to mention is that the current Congress didn’t vote to “spend this money,” and the previous congresses that made these “promises” didn’t provide enough revenues to pay for them.


Like other aspects of the debt limit debate, popular narratives about why the national debt has become so massive are false. Two of the most common are that tax cuts and military spending are largely to blame.

Contradicting those claims, the share of the U.S. economy collected in federal taxes has been roughly level for 80+ years, and military spending has plummeted from 53% of government outlays in 1960 to only 13% in 2021.

The main driver of the debt is federal spending, which has grown from 3% of the U.S. economy in 1930 to 24% in 2022. This spending is primarily due to social programs, which rose from 21% of federal outlays in 1960 to 73% in 2021.

Naturally, ardent proponents of those debt-inducing programs are trying to raise the debt ceiling, eradicate it, or ignore it. Their arguments, however, are rife with deceit. Contrary to what they claim:

  • the U.S. government will not default on its debt or cut Social Security payments in the event of a debt limit stalemate—unless Biden chooses to flout the law and the Constitution.
  • the Treasury—which is run by the President—has the legal authority and technological capability to prioritize spending.
  • the debt limit serves important purposes, including transparency, accountability, and giving voters an ongoing say in how their money is spent.


This article was published by Just Facts Daily and is reproduced with permission.

A Frightening Solution to the Debt Ceiling Crunch

Estimated Reading Time: 7 minutes

Much has been written about the Congressional debt-ceiling standoff. US Treasury and Federal Reserve Board officials have insisted that the only way to prevent a federal government default on its debt is for Congress to simply raise the debt ceiling without requiring any reduction in spending and deficits.

However, more imaginative measures could be taken to forestall a general federal government default without increasing the debt ceiling. For example, we have previously shown that legislation that increases the statutory price of the US Treasury’s gold holdings from its absurdly low price of $42.22 per ounce to something close to gold’s $2000 per ounce market value provides an efficient process—one historically used by the Eisenhower administration—to significantly increase the Treasury’s cash balances and avoid default while budgetary debate continues.

In this note, we explore, as a thought experiment, the possibility that the cancellation of up to $2.6 trillion of the $5.3 trillion in Treasury debt owned by the Federal Reserve System could be used to avert a federal government default without any increase in the debt ceiling. We suggest that, given the enforcement of current law, federal budget rules, and Federal Reserve practices, such an extraordinary measure not only would be permissible, but it could be used to entirely circumvent the Congressional debt ceiling.

The Federal Reserve System owns $5.3 trillion in US Treasury securities, or about 17% of the $31 trillion of Treasury debt outstanding. The Fed uses about $2.7 trillion of these securities in its reverse repurchase agreement operations, leaving the Fed with about $2.6 trillion of unencumbered US Treasury securities in its portfolio.

What would happen if the Fed “voluntarily” released the Treasury from its payment obligations on some of all of the unencumbered US Treasury securities held in the Fed’s portfolio, by forgiving the debt? We believe there is nothing in Constitution or the Federal Reserve Act that would prohibit the Fed from taking such an action. This would free up trillions in new deficit financing capacity for the US Treasury without creating any operating difficulties for the Federal Reserve.

There is a longstanding debate among legal scholars as to whether the Fourteenth Amendment to the Constitution makes it unconstitutional for the federal government to default on its debt. But voluntary debt forgiveness by the creditor on the securities owned by the Federal Reserve would not constitute a default and the arguments related to the Fourteenth Amendment would not be applicable.

The Federal Reserve System is an integral part of the federal government, which makes such debt forgiveness a transaction internal to the consolidated government. However, the stock of the twelve Federal Reserve district banks is owned by their member commercial banks. Would it create losses for the Fed’s stockholders if the Fed absolved the US Treasury of its responsibility to make all payments on the US Treasury securities held by the Fed? We don’t think so.

The Fed has already ignored explicit passages of the Federal Reserve Act that require member banks to share in the losses incurred by their district Federal Reserve banks. Under its current operating policies, the Fed would continue to pay member banks dividends and interest on member bank reserve balances even if the entire $2.6 trillion in unencumbered Treasury debt securities owned by the Federal Reserve System were written off. Such a write-off would make the true capital of the Federal Reserve System negative $2.6 trillion instead of the negative $8 billion it is as of April 20.

The Federal Reserve Act requires member banks to subscribe to shares in their Federal Reserve district bank, but member banks need only buy half the shares they have pledged to purchase. The Federal Reserve Act stipulates that the “remaining half of the subscription shall be subject to call by the Board.” At that point, the member banks would have to buy the other half. Presumably, the Fed’s founders believed that such a call would be forthcoming if a Federal Reserve Bank suffered large losses which eroded its capital.

In addition, Section 2 of the Act [12 USC 502] requires that member banks be assessed for district bank losses up to twice the par value of their Federal Reserve district bank stock subscription.

The shareholders of every Federal reserve bank shall be held individually responsible, equally and ratably, and not one for another, for all contracts, debts, and engagements of such bank to the extent of the amount subscriptions to such stock at the par value thereof in addition to the amount subscribed, whether such subscriptions have been paid up in whole or in part under the provisions of this Act. (bold italics added)

To summarize, Fed member banks are theoretically required to buy more stock in a losing Federal Reserve district bank and to be assessed to offset some of the Reserve Bank’s losses. However, these provisions of the Federal Reserve Act have never been exercised and are certainly not being exercised today, in spite of the fact that the Fed’s accumulated losses are now greater than its capital. Indeed, the Fed consistently asserts that it is no problem for it to run with negative capital however large that capital shortfall may become.

Historically, all Fed member banks were entitled to receive a 6 percent cumulative dividend on the par value of their paid-in shares. Subsequently, Congress reduced the dividend rate for large banks to the lesser of “the high yield of the 10-year Treasury note auctioned at the last auction” (currently 3.46%), but maintained the 6% for all others. The Fed is now posting large operating losses but is still paying dividends to all the member banks. We confidently predict it will continue to do so.

Unlike normal shareholders, member banks are not entitled to receive any of their Federal Reserve district bank’s profits beyond their statutory dividend payment. The legal requirements and Federal Reserve Board policies governing the distribution of any Federal Reserve System earnings in excess of its dividend and operating costs have changed many times since 1913, but today, the Fed is required by law to remit basically all positive operating earnings after dividends to the US Treasury—but now there aren’t any operating earnings to remit.

Let’s hope Congress closes this potentially massive budgetary loophole while the idea of the Fed’s forgiving Treasury debt remains just a thought experiment.

Beginning in mid-September 2022, the Federal Reserve started posting cash losses. Through April 20, 2023, the Fed has accumulated an unprecedented $50 billion in operating losses. In the first 3 months of 2023, the Fed’s monthly cash losses averaged $8.7 billion. Notwithstanding these losses, the Fed continues to operate as though it has positive operating earnings with two important differences—it borrows to cover its operating costs, and it has stopped making any remittances to the US Treasury.

The Fed funds its operating loss cash shortfall by: (1) printing paper Federal Reserve Notes; or (2) by borrowing reserves from banks and other financial institutions through its deposits and reverse repurchase program. The Fed’s ability to print paper currency to cover its losses is limited by the public’s demand for Federal Reserve Notes. The Fed borrows most of the funds it needs by paying an interest rate 4.90 percent on deposit balances and 4.80 percent on the balances borrowed using reverse repurchase agreements. These rates far exceed the yield on the Fed’s investments.

In spite of its losses, the Fed continues to pay member banks both dividends on their shares and interest on their reserve deposits. The Fed has not exercised its power to call the second half of member banks’ stock subscriptions nor has it required member banks to share in the Fed’s operating losses.

Instead of assessing its member banks to raise new capital, the Fed uses nonstandard, “creative” accounting to obscure the fact that it’s accumulating operating losses that have rendered it technically insolvent.

Under current Fed accounting policies, its operating losses accumulate in a so-called “deferred asset” account on its balance sheet, instead of being shown as what they really are: negative retained earnings that reduce dollar-for-dollar the Fed’s capital. The Fed books its losses as an intangible “asset” and continues to show it has $42 billion in capital. While this treatment of Federal Reserve System losses is clearly inconsistent with generally accepted accounting standards, and seemingly inconsistent with the Federal Reserve Act’s treatment of Federal Reserve losses, Congress has done nothing to stop the Fed from utilizing these accounting hijinks, which the Fed could also use to cancel the Treasury’s debt.

Under these Fed operating policies, if all of the unencumbered Treasury securities owned by the Fed were forgiven and written off, the Fed would immediately lose $2.6 trillion. It would add that amount to its “deferred asset” account. Because the Fed would no longer receive interest on $2.6 trillion in Treasury securities, its monthly operating losses would balloon from $8.7 billion to about $13 billion, for an annual loss of about $156 billion. Those losses would also go to the “deferred asset” account. Treasury debt forgiveness would delay by decades the date on which the Fed would resume making any remittances to the US Treasury, but by creating $2.6 trillion in de facto negative capital, the Fed would allow the Treasury to issue $2.6 trillion in new debt securities to keep on funding federal budget deficits.

Under the federal budgetary accounting rules, the Fed’s deferred asset account balances and its operating losses do not count as expenditures in federal budget deficit calculations, nor do the Fed’s borrowings to fund its operations count against the Congressionally imposed debt ceiling. So in short, the Fed offers a way to evade the debt ceiling.

In reality, of course, the debt of the consolidated government would not be reduced by the Fed’s forgiveness of Treasury debt. This is because the $2.6 trillion the Fed borrowed (in the form of bank reserves and reverse repurchase agreement loans) to buy the Treasury securities it forgives would continue to be liabilities of the Federal Reserve System it must pay. The Fed would have $2.6 trillion more liabilities than tangible assets, and these Fed liabilities are real debt of the consolidated federal government. But in accounting, the Fed’s liabilities are uncounted on the Treasury’s books. Under current rules, there appears to be no limit to the possibility of using the Fed to expand government debt past the debt ceiling.

In other words, the Fed’s write-off of Treasury securities and its ongoing losses could accumulate into a massive amount of uncounted federal government debt to finance deficit spending. A potential loophole of trillions of dollars around the Congressional debt limit is an astonishing thought, even by the standards of our current federal government. Let’s hope Congress closes this potentially massive budgetary loophole while the idea of the Fed’s forgiving Treasury debt remains just a thought experiment.

This article was published by Law and Liberty and is reproduced with permission.

House Passes Debt Ceiling Increase After Republicans Keep Key Inflation Reduction Act Provision

Estimated Reading Time: 2 minutes

The House of Representatives passed legislation Wednesday that would raise the debt ceiling through the end of March 2024 or by $1.5 trillion.

The Limit, Save, Grow Act passed almost entirely along party lines, with 217 Republicans in favor. All 211 voting Democrats and four Republicans voted against the legislation, which is unlikely to pass the Senate. The bill serves as an opening salvo in negotiations between Speaker of the House Kevin McCarthy and President Joe Biden, who is refusing to sign any debt ceiling legislation that includes any other provisions.

The GOP’s four-seat House margin forced party leadership into late-night negotiations with more than a half dozen holdouts, most of whom represent Midwestern states. Those members included the entire Iowa delegation, who objected to a provision eliminating ethanol and other subsidies included in the 2022 Inflation Reduction Act. Wisconsin Rep. Derrick Van Orden was able to insert an amendment keeping some of the subsidies in place.

“I will always stand with the farmers who feed America. I’m glad that elements of my amendment were included in the revised Limit, Save, Grow Act that protect our corn growers and biofuels industry. That is a win for Wisconsin and America,” Van Orden said in a statement.

Other Republicans demanded more stringent work requirements for welfare recipients in exchange for their support. Florida Rep. Matt Gaetz, New York Rep. George Santos and Tennessee Rep. Tim Burchett called on GOP leadership to increase the number of work hours for welfare recipients from 20 to 30 per week. House Freedom Caucus members Chip Roy of Texas and Scott Perry of Pennsylvania both ultimately supported the bill after pushing for the work hours increase.

Santos, Roy, and Perry ultimately voted in favor of the bill. Gaetz, Burchett, Colorado Rep. Ken Buck, and Arizona Rep. Andy Biggs were the four Republicans who voted against.

The Limit, Save, Grow Act would save an estimated $4.8 trillion over 10 years, Congressional Budget Office director Philip Swagel wrote Tuesday in a letter to House Budget Committee chairman Jodey Arrington of Texas. The legislation would cut discretionary spending by $3.2 trillion, according to Swagel, and mandatory spending by $700 billion. It would also raise federal revenue by $400 billion, he wrote. Swagel offered the estimates before final amendments were introduced.

The legislation is dead-on-arrival in the Senate, but forces Biden to negotiate with McCarthy. The two discussed the debt ceiling at the White House on Feb. 1 but have not met to review the legislation since. The White House blasted the Limit, Save, Grow Act, with communications director Ben LaBolt calling the cuts “draconian.”

“House Republicans are selling out hard-working Americans in order to defend their top priority: restoring the Trump tax cuts for the wealthiest and corporations at a cost of over $3 trillion,” LaBolt said in a statement.

Treasury Secretary Janet Yellen began taking “extraordinary measures” to avoid a default Jan. 19. The U.S. government will likely go fully over the financial cliff sometime in the summer of 2023.

This article was published by The Daily Caller and is reproduced with permission.

The “Extraordinary Measures” that the Government Uses in the Debt-Ceiling Farce to Delay a Default

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The government can manipulate the gross national debt to keep it below the debt ceiling while issuing new debt. But not for long. Then the game is over.

Periodically, we get to watch our favorite farce, played out in Washington DC in front of a bedazzled world, a product of true creative genius that only American politicians could ever come up with the Debt Ceiling Farce. This one is the Debt Ceiling Farce of 2023. We’re in the middle of it now, the point where the plot starts getting funny. The funny part is how close the government’s checkbook balance will go to zero before the farce is over.

On March 31, there was $194 billion in the government’s checkbook, the Treasury General Account (TGA) at the Federal Reserve Bank of New York, according to the Treasury Department this afternoon. During the two Debt Ceiling Farces of 2021, in October and in December, the balance dropped to $46 billion and $42 billion at the respective low points. During the Debt Ceiling Farce of 2017, the balance dropped to $39 billion. With the huge amounts of money that flow into and out of this account on a daily basis, that was pretty close. Congress then went ahead and lifted the debt ceiling, and the farce was over and everyone went home.

But the cash in the TGA account is only one factor. The other factor is something called the “extraordinary measures” – and we’ll get to them in a moment.

The ending of the farce is already known: Congress will agree on a deal at the last minute, as it has done around 79 times since 1960, and seven times over the past decade.

If they don’t agree on a deal, the US government will default on its obligations, hopefully starting with Congressional salaries, benefits, pension payments, and toilet paper.

But because lawmakers in Washington have stashed lots of theirpersonal wealth in the markets, they’re sensitive to a US government default blowing up said wealth from one day to the next. And with their personal wealth at stake, they’ll get this worked out for sure.

It’s a farce because Congress already appropriated the funds to be spent, telling the Administration in detail via legislation how to spend those funds, and then Congress tells the Administration that it cannot borrow the funds that Congress told it to spend. This whole process is accompanied by all kinds of hilarious rhetoric for the entertainment of us all.

On January 19, the US gross national debt hit the debt ceiling, set by Congress at $31.4 trillion. The Administration now cannot increase the gross national debt. And it has remained flat since then. But note what always happens the day after Congress lifts the debt ceiling: the debt spikes! (We’ll get to the circled event in a moment under “Extraordinary measures at the end of the fiscal year?”):

For example, after the last two debt-ceiling farces ended in October 2021 and in December 2021:

On October 13, 2021, Congress lifted the debt ceiling. The next day, the gross national debt spiked by $300 billion! Over the next seven business days, the debt spiked by $480 billion!….


Continue reading this article at Wolf Street.

Is the Debt Ceiling Lunacy?

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The United States is bumping up against the debt ceiling once again. The Treasury department has begun taking extraordinary measures to ensure it can continue to service its debts on time. Secretary Yellen has said these measures should be sufficient until June. Some project they might work until August.

Many pundits act as if there is no good reason to have a debt ceiling. They say Congress implicitly approves an increase in debt when it passes revenue and spending bills. They think requiring Congress to explicitly raise the limit on issuing debt is unnecessary and—since it increases the odds of default—unnecessarily risky. Some go so far as to describe it as lunacy.

David Beckworth discussed the debt ceiling with Michael Strain on a recent episode of Macro Musings. Strain, who is the Director of Economic Policy Studies and the Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute, provides a clear statement of the view described above:

[…] the gap between spending and revenues is implicitly determined by Congress. It doesn’t make any sense to require Congress to explicitly authorize these periodic debt ceiling increases.

The debt ceiling puts the President and the Executive Branch in a weird position of kind of picking which laws it will break and will not break. You know, it would be illegal for the Treasury department to issue additional debt if Congress didn’t raise the debt ceiling. It is also illegal for the Treasury department not to spend the money that it is required by law to spend. So, which of those two laws is Treasury going to break?

Given Congress’s implicit consent to raise the debt ceiling, Strain argues, there is no reason to require explicit consent.

I am sympathetic to Strain’s broader argument. We are a nation of laws. Our laws should be consistent. The government should not make promises and then fail to keep them. We should keep our promises and honor our debts.

That said, I don’t buy the implicit consent argument. And I don’t think the debt ceiling is lunacy. To the contrary, I think the debt ceiling might serve as a useful constraint.

On Implicit Consent

To be honest, I have never quite understood the implicit consent argument. If passing a spending bill that exceeds the revenues authorized by Congress implies consent for raising the debt ceiling, why is raising the debt ceiling so difficult? That it is so difficult suggests that a majority in the House or Senate has not already consented to a higher debt level.

We have known that majority voting systems can produce inconsistencies since the 18th century. One should not assume Congress prefers A to B just because they have indicated they prefer B to C and C to A. They might also prefer B to A. Therefore, it is inappropriate to assume that passing a spending bill that exceeds authorized revenues necessarily means Congress is willing to raise the debt ceiling. And, if Congress is not willing to raise the debt ceiling, it is not obvious why its decisions on revenues and spending should force it to change its decision on the debt ceiling. One might just as easily argue that its decision not to raise the debt ceiling should force it to change its decision on revenues or spending.

On Constraints

A binding constraint prevents one from doing what he or she would like to do. Relaxing such constraints, therefore, generally makes us better off. But it is naive to think all constraints are bad. Sometimes constraints make us better off.

Think about dieting. In principle, anyone can lose weight: just burn more calories than you take in. And, yet, many of us struggle to do so. You might say, “Just don’t eat the chips. It’s inconsistent with your goal of losing weight.” But, for some of us, having chips in the house is a temptation we can’t resist. If we are serious about losing weight, we adopt hard rules like “Never buy chips.”

Can one lose weight while still enjoying the occasional handful of wavy Lay’s? Sure. But, if we are likely to err in the eat-too-many direction (and likely to do so frequently), going cold turkey might be a better option.

The Potential for Strategic Interaction

Richard Thaler and H. M. Shefin describe self-control problems, like the dieting decision discussed above, as a problem of two selves. My future self wants to be thinner. My current self wants to eat chips. The hard constraint aligns the decisions of my current self with the goals of my future self.

The need for hard constraints is perhaps even more clear when we are dealing with truly separate selves: different people with different objectives. With separate selves, we must think seriously about strategic interactions: individuals make decisions today based, in part, on the decisions they expect others will make in the future. If there is scope for strategic interactions, hard constraints might make us all better off.

There is certainly scope for strategic interaction in Congress. Congress is not a single acting entity: the decisions of Congress are actually the decisions of a majority of its members. Moreover, the majority specifying how much to spend might not be the same as the majority specifying how much can be raised in taxes. And the decisions individual members of Congress make with respect to how much to tax and how much to spend depend, in part, on the decisions they expect others to make in the future. By treating Congress as a single acting entity, those advancing the implicit consent argument obscure the potential for strategic interactions.

A simple example serves to illustrate. Suppose a Senator supports higher spending and higher taxes. A spending bill comes up, which he would happily support if he knew taxes would be increased to cover the additional spending. His colleagues assure him that they will support a tax increase in the near future.

What‘s a budget-balancing Senator to do?

If he doesn’t support the spending bill today, he risks seeing that bill fail. That’s bad, in his view, because he thinks the additional spending is warranted.

If he supports the spending bill today, he faces the risk that his colleagues will renege when a tax bill comes up in the future. That’s bad, in his view, because he thinks the additional spending should be paid for with additional tax revenues.

The potential for parties to engage in ex-post negotiation makes it harder to reach an agreement ex-ante.

Enter the Debt Ceiling
The debt ceiling provides a limit on the potential for ex-post renegotiations. Our hypothetical budget-balancing Senator can vote for the spending bill today, knowing that in the future his colleagues will be forced to grapple with the imbalance. They must either raise taxes (as he’d prefer), forgo the additional spending (his second best policy outcome), or—if he’s in the minority—raise the debt ceiling.

Obviously, this is a simple example. But it illustrates an important point: sometimes constraints make us better off.


It’s tempting to think that all constraints are bad. In fact, we often impose constraints on ourselves and our counterparties to achieve better outcomes than would be possible in the absence of constraints.

Left unconstrained, many individuals will eat more calories than they should. That’s why they impose constraints on themselves! Likewise, unconstrained politicians are likely to authorize more borrowing than they should. The debt ceiling might provide a useful—if somewhat limited—constraint against excessive borrowing.

This article was published by AIER, American Institute for Economic Research and is reproduced with permission.