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I am bit confused as to what the debt ceiling actually means.

From my understanding congress passes a budget that instructs the treasury to spend money on specific programs. When the debt ceiling is reached, the treasury is unable to fulfill what congress has legislated in the budget. Which piece of legislation wins?

Can the treasury choose to just pay of the interest on the debt using tax revenues, roll over the debt and then choose to fund only certain parts of the budget with the remaining tax revenues?

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It is important to note that what the debt ceiling actually is, is the bill for spending that has already taken place coming due for payment, not the initiation of new spending. So there is no conflict between which law Treasury should follow, because that decision was already made some time in the past based on the Full Faith and Credit of the United States. The money needed to implement all spending, not some of it, has already been spent (on credit) and the debt limit being reached is just a marker of when that money physically leaves the Treasury's account. The debt limit is the statutory limit of borrowing that the Treasury is allowed.

In fact, the United States would have reached the limit sometime in December, however, the Secretary of the Treasury Tim Geithner has been making prioritized decisions for awhile now in order to extend the deadline as far as possible. That is, he has stopped funding discretionary things within the federal government that don't go to outside creditors so that there is more money on hand to pay those creditors as their bills come due.

There are logistical problems with prioritizing payments further as Senator Toomey would like to mandate that @DVK did a good job of laying out in his answer. However, most observers think that the government would still default without a raise in the limit, because the payments owed in March (when the limit is expected to be reached) do not all come due at the end of the month. Most are due on the 15th, and the income tax revenues the Treasury takes in each day very wildly. While the United States takes in enough in a month to pay these minimum payments, it is unlikely that we would do so early enough in the month to make all payment obligations.

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Looks like Treasury is NOT currently legally constrained in what it can do.

This article has pretty good analysis, but from a legal standpoint it amounts to "no limits".

Possible options that they discuss are:

  • Prioritize some payments. Especially servicing of existing and rolling over of maturing debt.

    This seems like fiscally prudent option, since it avoids credit default.

    • As a matter of fact, Sen Toomey tried to introduce the legislation to force Treasury to service the debt first, so far unsuccessfully since Democrats find it a big political loss if Republicans manage to decouple the risk of default from the need to raise debt ceiling).

    • However, even political games aside, this may be hard to do practically, since in its infinite wisdom our government didn't design the payment systems to be ABLE to prioritize at will, as per the Bipartisan Policy Center (BPC).

    • However, RealClearPolicy blog quotes Wall Street Journal thusly:

      Despite the Treasury’s insistence that prioritization is unworkable for logistical reasons, the same Journal story reports that interest payments on the debt are made through a separate system altogether: “It is technically possible to prioritize interest payments because they are delivered over a different payment system, known as Fedwire, than the millions of other day-to-day payments the government makes to vendors, Social Security recipients and others.”

      Given that the point of prioritization schemes like Toomey’s is to ensure that U.S. Treasuries wouldn’t be called into question, this is an important fact.

  • Pay with delays as the funds become available, on first come first serve basis. BPC has very detailed analysis on what the delays would look like.


Fitch seems to have doubts about whether the debt could be serviced, but I'm not sure I greatly trust Fitch to be correct :)

With no legal authorisation for net debt issuance, the Treasury would be forced to immediately eliminate the deficit - a fiscal contraction twice as great as the recently avoided 'fiscal cliff' - by delaying payments on commitments as they fall due.

It is not assured that the Treasury would or legally could prioritise debt service over its myriad of other obligations, including social security payments, tax rebates and payments to contractors and employees. Arrears on such obligations would not constitute a default event from a sovereign rating perspective but very likely prompt a downgrade even as debt obligations continued to be met.

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