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Beyond the troubling debt-ceiling standoffs we witness every few years looms a far more dire threat: a true US government default, which economists warn could lead to a collapse of confidence in the American economy, a run on the dollar, and perhaps even a global economic meltdown. How close are we to such a catastrophic federal default?
To answer this question, a group of private-sector economists and fiscal policy experts has formed a citizens’ committee, called the Default Clock Committee, to maintain an objective, fact-based Federal Government Default Clock. The Clock is designed to help the public to see and track the nearness of the danger.
For the Committee’s purposes, “default” is defined simply as a failure by the US Treasury to make a scheduled interest payment on just one direct US Government obligation such as a Treasury note or bond. “Insolvency” is defined as the point beyond which default becomes a virtual certainty.
Since 2013, Congress has gotten into the habit of temporarily suspending the government’s statutory debt ceiling, for a year or two at a go, during which time the Treasury may incur unlimited amounts of debt. This practice is dangerous. Repealing the debt ceiling does not repeal the threat of a default. Indeed, to think that it would or could is akin to thinking we can be assured of perpetually sunny days if we simply destroy the barometer. Congress seems to be telling itself: “If I just increase the credit limit on my credit card, I will never have to pay it off!”
The debt ceiling is our most important fiscal barometer, and we hope our new Default Clock will help the public to read that important gauge more easily, by showing us in a clear and simple way how close we are to midnight. Its purpose is to spur fiscal policy makers to change course before it’s too late.
The 10 Tests
The Clock continuously measures 10 of the most relevant budget factors, or tests, each of which is framed as a simple yes-no question. At any given moment, the status of the 10 factors collectively determines the number of minutes from midnight the Clock stands at any point in time. The number of minutes, of course, changes as time passes and new data is received. Each factor assesses, not just where things currently stand, but also where things are projected to move over the course of the next 10 years. Each of the 10 tests is objective. None is arbitrary or influenced by opinion.
Here are the ten factors:
- Do federal outlays exceed 17.5 percent of gross domestic product (GDP)?
- Is there a US dollar-denominated debt ceiling in law presently, and will the projected federal debt stay below that ceiling during the 10-year budget period?
- Does the gross federal debt exceed 100 percent of GDP?
- Do gross federal interest payments exceed 15 percent of federal revenues?
- Do gross federal interest payments, on a sustained basis, exceed 80 percent of the money the federal government brings in through the issuance of new debt?
- Does the ratio of debt held by the public exceed 80 percent of the gross debt?
- Is the debt held by the Federal Reserve below 15 percent of the debt held by the public?
- Does debt held by foreigners exceed 50 percent of the debt held by the public?
- Does the share of the debt held by the public in the form of Treasury inflation-protected securities (TIPS) exceed 15 percent?
- Do federal revenues fall below 17.5 percent of GDP?
While economists and financial experts will readily appreciate the relevance of each of these factors, we realize that the lay reader may find them confusing. For everyone’s benefit, the Default Clock Committee has published here a detailed, plain-English explanation of each factor, together with all of its underlying data and assumptions.
Warning: Default Ahead
The United States will reach insolvency—the point of no return—when the federal government fails at least eight of the 10 factors or tests listed above. As of right now, the federal government is currently failing four of them. These are Factors 1, 2, 3 and 10, but one (Factor 10) is projected to right itself. The remaining six are passing now, but are projected to fail sometime during the 10-year budget period.
As of today, the Federal Government Default Clock stands at just five minutes from midnight.
If the federal government remains on its currently projected fiscal trajectory, the more politically difficult and economically painful our choices become as time passes.
The Default Clock is ticking.
The authors are members of the Default Clock Committee, which operates under the auspices of the Compact for America Educational Foundation. The Foundation is a key sponsor of the Federal Government Default Clock project. The Committee members are identified at the link provided.