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Five Minutes to Midnight: Announcing the “Federal Government Debt Default Clock”
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.
Published in Economics
I agree that we’re in trouble, and I’ve been saying for years now that we’re doomed, DOOMED! I’m a little skeptical that the metrics you’ve chosen are useful; not because I’m an economist, but because people will probably just ignore it because nothing has obviously broken so far, so why worry?
In fact, the only thing I really take issue with is the concept of a ‘countdown clock’ itself. I just hate these things, especially the nuclear war doomsday clock. I’d prefer, say, a thermometer that shows more red as you reach a ‘boiling point.’
But it probably doesn’t matter much, since we’re all doomed.
I’m far more concerned with the external debt, because foreign dollar holders, (all central banks and private treasury holders in every country, directly or indirectly everybody) will be watching these indicators as well and at some point well before midnight, will begin to shift away from dollars towards gold Yuan, Euros, or just a basket of others and dollars. The dollar will fall, interest rates will rise, debt service will become ever more difficult and the fear of crisis causes the crisis, the way it always does. We can deal with this threat by taxing consumption in stead of savings, work and investment, which we should do even if we were debt free. Just by replacing the payroll tax with a VAT for instance, we could privatize younger workers, significantly increase our savings directly with the forced savings and indirectly by taxing consumption instead of work. This doesn’t require painful cutting of SS, just leadership and while we must cut government spending, if we can raise the savings rate so that we borrow our deficits from ourselves, its not doom we face just fights over who gets what.
4% on the Ten year treasury and the USA is broke. The End.
Simon Mikhailovich. I love this guy.
The issue is, centralized power and central planning by politicians and propeller heads. Vote buying. Getting past the next election. “Experts” “helping” us. Why freakout about Trump? That stuff is the problem.
@I Walton: The special risks posed by foreign holders of Treasury securities are covered in the Default Clock factors. See Factor 8. — Baker
The Government Default Clock is good. Better yet, encourage conservative & libertarian writers to report on the debt and deficit in per capita terms.
Few people can get their heads around numbers like billion and trillion, much less interest on such numbers.
When writing about debt and deficits, tell Americans that every man, woman and child in the country is on the hook for $50,000+ in federal debt. So-called reporters won’t do this – they don’t care and/or they lack the math skills.
@RufusRJones: Indeed, increases in interest rates will make it more difficult for the Treasury to finance the increasing debt because of rapidly rising overall interest costs. This issue is covered in Factors 4, 5, 7 and 9. — Baker
@Belt: I appreciate your problem with the countdown mechanism behind the Default Clock. The Default Clock Committee is prepared to examine an additional metric of a real world timeline, which may be measured in “months to default.” It might work; it might not. — Baker
I once watched a YouTube of Kyle Bass, the great hedge fund guy. He interviewed all of the major central bankers and politicians around the world. He said nobody in the U.S. Congress is worried about this at all. It’s insane.
This is much more useful than a doomsday clock as financial metrics are measurable and can be objectively quantified. That’s not the case with international tensions.
That would be interesting, especially since you’re appealing to hard metrics to say why there’s a hard time limit. But what if you reach the limit and nothing obvious happens? (And probably, nothing obvious will immediately happen.) You’ll risk the ‘cry wolf’ scenario. Are there interim stages of doom that we’ll run into? Something that will likely happen if certain conditions obtain, that you can point to as evidence of a terminal crisis coming down the road?
Of course, I’m not disputing anything you say. Every indicator is important but the debt crisis will come as a dollar sell off and will come out of the blue and might even be precipitated on purpose. We’re even more vulnerable than the clock indicates and we must, that’s an unambiguous must, increase our savings, which I’m suggesting is quite feasible with leadership and some propaganda effort. Replacing the payroll tax with a uniform vat is more concrete and understandable than the abstraction of debt, deficits, interest rates etc.
What’s magic about 8? Is it failing any 8 tests that make it “virtually certain” that we default on a payment, or could it happen with some combination of 6 or 7 failures?
A government which borrows in a money which it creates, in whatever amounts it pleases, will only default if it pleases.*
So the central premise of the article, and of the public relations project it promotes, is an economic fallacy.
*Detailed explanation
If such a government chooses not to default in a given year, then it will
however much money is required to service its debt. The amount it chooses to borrow in a given year (rather than tax or create), will equal the amount voluntarily lent by
The remainder, whatever they may be, will be created by its central bank and lent (perhaps indirectly, via open market operations, as in the US today.)
In the US today, the government can’t create money, so it uses only taxing and borrowing. But it’s been proposed to give the government the legal power to create “sovereign money”. It makes no difference if they do that or not.
That’s not to say that the government would hesitate to default, if that suited its desire for power. It has done so twice, in both cases by executive fiat. The first president to do it, while simultaneously confiscating the public’s money, was FDR. Far from being held accountable by the public for the deed and for its disastrous consequences, he is hailed to this day as an economic savior. The second, Nixon, likewise doesn’t seem to have suffered much in reputation for either the crime or its terrible economic effects.
In both cases, widespread economic illiteracy came to the rescue, and that means that politicians will be that much more encouraged to consider the possibility in the future.
I want the Fed to “pay” for everything.
I don’t follow. The government spends more than it collects from citizens so borrows from banks so that’s still no creation, but then the Fed buys the debt and provides reserves by making a book entry. Why isn’t that creating money? The debt is on the Fed’s books to be sure and it all balances, but it just sits there indifferent to interest rates but the money that gave rise to it is in circulation and enjoys the money multiplier. I’ve seen this before from first rate monetary economists but don’t really understand.
Moreover, at the point we can’t borrow at any interest rate, we become like a normal country facing a balance of payments crisis and the dollar must plummet, inflation must take off. You can say there is always some interest rate at which we can borrow, but that’s only true in the medium or long run, There will be a point, perhaps very short lived, when nobody will buy dollars for fear of further devaluation, the George Soros of the world will borrow dollars and buy the best alternative they can readily find if they see us reaching such a point. They will be in a position to make a one way bet. The most they can lose is a few days interest. We’re only different because foreigners hold their reserves and trade in dollars as they did in the pound..
As I said, it is creating money:
[Emphasis added]
If you choose to call the Fed part of government (which I would not quibble with) then the government itself is creating money, even today. But I was distinguishing semantically between the current monetary regime and direct creation of money by Government:
My biggest complaint about the article and the campaign is not that it warns of a non-existent threat, even though that exposes conservatives to counter-attack based on truth (progressivists are not above telling the truth, on the rare occasions when it helps their cause).
The biggest problem is that by focusing on the method of financing of government spending, it misidentifies the nature of the danger itself. It is not government debt, borrowing, or taxes that cause the main economic destruction.
It is government spending. Different government financing choices redistribute wealth differently, which destroys wealth by itself through economic distortions, but this is only a secondary effect.
The direct cost of government born by the people is measured by the proportion of scarce real resources which is diverted in the current year to the political class. This quantity is the same, no matter whether the spending is financed by taxes, credit, or ex nihilo money creation. It is unaffected by price inflation.
IMO, this is why people need welfare and you are stupid to not rent seek or control some rentier-style assets. Why be genuinely productive? There are better options. That could probably be articulated better, but that’s what I think. Socialism is basically only going to reverse after the bond market collapses.
@RufusRJones: Wow, I am glad I have generated interest. Regarding your comment on Bass, it is insane.
@markcamp: I disagree that a national government can always avoid default. Argentina and Greece demonstrate why. Creating money and inflating the currency does not work either. Venezuela demonstrates why. Also, the Treasury faces a problem on the inflation front because so many federal spending and revenue accounts are indexed for inflation. For the Fed, this starts with TIPS. Finally, for historical reasons I do not understand, Fed holdings of Treasuries are accounted for as “debt held by the public.” Further, the Fed is currently working in the other direction by pulling back from quantitative easing and gradually raising interest rates. These Fed actions actually put more pressure on the Treasury in terms finding outside capital to invest in its securities. — Baker
@nickh: There is nothing magical about 8 of the 10 factors. It is to provide flexibility because an individual factor can be manipulated through a variety of fiscal policy steps. The Default Committee needs this flexibility to discount a factor because of such manipulation. The full scope of the 10 factors cannot be manipulated in concert, at least not without taking a variety of very difficult steps. — Baker
One thing to keep in mind is, there is a ton of global debt denominated in dollars, and this keeps a bid under the dollar. That doesn’t mean that bad things can’t happen, though, because our political system will keep abusing the privileges of having the reserve currency, decent property law from our fore fathers, and a powerful military.
delete
If you don’t understand this, do you understand anything? Just asking.
Yes but Greek debt was denominated in Euros, and Argentina had pegged its peso to the dollar, so neither meet’s Mark’s criteria:
I don’t think anyone here is saying inflation is a good outcome; it just seems a more likely outcome than default.
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They have to. There is no stopping it. Central banks will keep creating asset bubbles and inflation until something breaks, i.e. The bond market. Freaking out about Trump is ridiculous in view of that.
I said that a national government which borrows and can create at will the same money can always avoid default.
Argentina and Greece demonstrate why I specified that only governments which borrow only money that they can create can always avoid default. Argentina defaulted on USD debt. Greek defaulted on Euro debt.
If Venezuela had only borrowed bolivars, which they could (and did) create and deflate at will, then they would not have defaulted in November. In fact, they borrowed USD, which they are not able to create. That’s why they defaulted.
An immutable law of political economy is that politicians are always and everywhere inflationists. Why? Because inflation isn’t a “problem” from their point of view. Inflation is chocolate candy for the typical politician.
Right. And what will politicians in every era and in every country do when a law that they have chosen to pass a law begins to deprive them of too much of the pleasure of borrowing good money and paying back bad money?
Exactly. They will change that law.
Thx, Joseph. I couldn’t have said it better myself. (As it happens, I read your comment out of sequence, and as a result, I DID say it myself, but you said it better :-)