Terry Jeffrey: The Dirty Little Secret of the Debt Limit

June 22, 2011 - 5:04 AM
Economy Geithner

U.S. Treasury Secretary Timothy Geithner speaks to members and guests of The Harvard Club of New York City, Tuesday, May 17, 2011 in New York. (AP Photo/Mary Altaffer)

"Today, the United States has reached the statutory debt limit," Treasury Department spokeswoman Colleen Murray said in a May 16 statement.

Did it really? Or is the legal debt limit merely a sleight-of-hand tactic in the most high stakes shell game every played?

Take a look at what the Treasury Department has reported on its Daily Treasury Statements since May 16, when Treasury said it had "reached the statutory debt limit."

Table III-C of the statement is titled "Debt Subject to the Limit." The May 16 statement -- giving the status of the government's accounts as of the close of business that day -- correctly stated that the national debt was subject to a limit of $14.294 trillion set in a law enacted Feb. 12, 2010.

This May 16 statement also said the "total public debt subject to limit" that day stood at $14.293975 -- a mere $25 million below the limit.

Whew! Close call, right?

OK, now move forward five weeks to the Daily Treasury Statement for June 20.

At first glance, it looks pretty good. Table III-C still says the legal limit on the debt is $14.294 trillion -- correctly reflecting the fact the Congress and President Obama have not agreed to a new law increasing the limit.

Even better, the line in Table III-C that lists the amount of the "total public debt subject to limit" says it is still $14.293975 trillion -- still exactly $25 million below the limit.

At a quick glance, the June 20 Daily Treasury Statement seems to say the federal government has not increased the national debt at all in five weeks.

But take another look.

The federal government's debt is essentially divided into two parts. One consists of publicly traded bills, notes and bonds that you and I and the Chinese and Japanese can buy from the U.S. government in public auctions and trade with each other in the open market.

The other part is what the Treasury calls "intragovernmental" debt. This is money the Treasury has taken and spent from surplus Social Security and Medicare taxes and from payments into federal-worker retirement programs and other streams of federal revenue that are deposited into so-called "trust funds."

These trust funds don't have actual money in them -- only IOUs from the Treasury that essentially say that when Social Security, or Medicare, or federal worker retirement programs, etc., need the money back to pay benefits, the Treasury will go out and tax or borrow the money away from people to make good on what they owe the "trust funds."

If you compare the May 16 and June 20 Daily Treasury Statements, you will see that unlike the "total public debt subject to limit" line, which has stayed exactly the same, the amount of the publicly traded debt and the intragovernmental IOUs have changed.

In fact, according to the statements, the publicly traded portion of the debt climbed from $9.717694 trillion to $9.738108 trillion between May 16 and June 20, an increase of $20.41 billion. At the same time, the intragovernmental IOUs dropped from $4.627843 to $4.606416, a decrease of $21.42 billion.

Bottom line: The Treasury made room for an increase in the federal government's publicly traded debt by decreasing its intragovernmental IOUs.

But does that mean the Treasury truly owes less money to any so-called "trust fund"? No, it does not.

Just as Congress has enacted a series of laws to legally limit the national debt, it has also enacted laws to allow the secretary of the treasury to temporarily change the way the Treasury accounts for money owed to government trust funds when the Treasury hits the so-called "debt limit" and needs to keep borrowing real money to keep big government going.

On May 16, Treasury Secretary Geithner wrote Senate Majority Leader Harry Reid, D-Nev., to notify Congress that he was about to begin acting under these laws.

In this case, Geithner said, "the Treasury will suspend additional investments of amounts credited to, and redeem a portion of the investments held by, the CSRDF (Civil Service Retirement and Disability Fund), as authorized by law." He also said, "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 Untied States, beginning today."

In plain English: Money derived from federal workers paying into their retirement accounts through these sources would not be counted as debt -- and some of the debt already owed to them would be temporarily taken off the books -- to make room for new borrowing from the public.

A fact sheet put out by Treasury said this would create a total of $214 billion in "headroom" for new publicly traded debt.

When Congress and the president enact legislation that raises the legal debt limit, said the fact sheet, the "CSRDF will be made whole" and the "G Fund will be made whole." The intragovernmental debt that has not been accounted for will go back on the books.

The lesson: The real test of what Congress and the president do now is not how they manipulate the "debt limit" they set for themselves but how much real government spending they actually cut and how fast they cut it.