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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 really wish the Republican Liberty Caucus would focus on what we are talking about, here. Who else will do it that matters?
Social Security has 5 trillion in U.S. government bonds that they are going to cash someday. I think that’s right.
The government has a semantic convention of referring to the Federal as being private, of calling the member banks the “owners”, although the Fed is in fact essentially a government agency.
To be consistent with this, they have to refer to Treasuries held by the Fed as being “held by the public”.
Pinnocchio’s nose grew longer every time he used a “semantic convention.”
When we can’t sell dollars, even if for just a few hours. it’s the same as defaulting because we can’t escape by creating dollars to pay our obligation; foreigners would just continue to dump them even after we close the banks. When we open banks our debt will have been reduced by 70 or 80%, and with luck the economy will continue, prices and wages will adjust to the inflation, but our middle class will have been wiped out unless they have their savings in productive assets, land or gold. Of course because of the panic Congress will do something that will turn this crisis into a long term super depression but it’s hard to guess what stupidity they’ll come up with. I think we should make an effort to reduce our current account deficit.
I love learning about this stuff.
@rufusrjones; @markcamp:
It is an assumption among too many federal policymakers that the federal government can always find ways to avoid fiscal crisis, insolvency and ultimately default. I am not convinced because I do not see where the money to finance $30 trillion in debt will come from. The Federal Reserve is in the process of limiting its holdings of Treasury securities. The federal government’s trust funds (primarily Social Security and Medicare), a significant source of funds up until now, are facing a diminished capacity to lend. Foreign investors, particularly some of them, can be unreliable for political reasons. Domestic private investors, in my view, will eventually come to see Treasury securities as no longer “risk free.” Increasing shares of money raised by the issuance of new debt (in net terms) will in the future go to paying dramatically increased interest costs on existing debt. Likewise, interest costs will take up larger shares of revenue (a better indicator of government capacity for borrowing than GDP). Ultimately, the pressures being heaped on the Treasury (specifically the Bureau of the Fiscal Service) to find the money will become enormous.
They took $5 trillion in funds raised by FICA taxation and spent it. Now represented by certificates in a filing cabinet located in Virginia.
I think that’s right. Why trust the government?
@josephstanko: Inflation is clearly not a good outcome for the economy, but under current circumstances I also do not see it as an effective avenue of escape from the risk of default. This because a significant portion of issued Treasury securities are in the form of TIPS and significant portions of the federal budget, both on the spending side and the revenue side, are indexed to inflation. Further, inflation will increase interest costs from the very high levels under current projections, whether resulting from Fed policies to combat inflation or the need for the Treasury to offer securities that produce a reasonable real rate of return for investors. Finally, please keep in mind that the Clock is based on current projections. Things can change. Indeed, the Committee hopes they will change in a positive way. If so, the Committee can add minutes away from midnight (default). Indeed, the Committee will review the Clock periodically in order to account for changes in projections. For example, if the federal government moved to eliminate indexing in its various programs and revenue sources and scaled back TIPS, it will cause the Committee to recognize that the inflation escape from default becomes more viable. This is not to say that it will conclude that these steps would be good for the economy. Regarding Greece and Argentina, I think Greece would have left the Eurozone and Argentina would have eliminated the peg, both prior to default, if these steps were so advantageous. — Baker
People don’t think about this dynamic enough. Inflation vs. actual human needs being met or more taxes. It’s like GOSPLAN.
Particularly after NAFTA passed and China opened up why run with any inflation? What good does it do? IMO, it just looked like it worked for all those decades. Now we have robots.
Within 7 years, net interest expense will exceed spending on everything else.
This is SO confusing to so many people! I will explain, but if you have any questions, please ask.
Social Security is often said by the Government and the media to have 5 T in U.S. bonds, but they aren’t really debt. They aren’t real bonds. Think of it as an internal-only US Gov. budgeting device, or an accounting trick if you please.
It helps to understand that these “bonds” represent “money” that the Government “owes” to ITSELF. Of course, no-one can owe money to himself–the idea is absurd–so there is no possibility of SS actually cashing “the IOUs”. “The IOUs” don’t exist.
It is like writing down a budgeting plan to put 200 dollars per month into your Vacation Fund, by putting the money in a drawer. Every month you decide to spend all of your income, but you still want to keep track of your Vacation Fund. So you write a note each month and put it in the drawer: “I, Rufus Jones, promise to pay 200 dollars to my Vacation Fund on August 1, 2018.” After a year when vacation time comes around, there is absolutely no danger of your Vacation fund cashing the 2400 dollars in IOUs. You can just rip them up. You could have ripped them up any time you wanted to, in terms of actual money in the real world.
Likewise, the Government could just rip up the “bonds” in its drawer, without having ANY effect on anyone. (Other than re-writing its original procedures and plans.)
My understanding is, they took 5 trillion of FICA taxes and spent it. Now, when this Social Security annuity comes due they have to tax for it, or sell bonds for it and spend it again.
Great discussion of this stuff, here.
and here.
I love this.
The USG each year collects taxes, borrows money, and spends the sum of the two. The FICA taxes and FICA distributions are just part of that flow.
There are no assets being purchased to fund future FICA distributions, as there would be with an actual retirement fund.
I think that is what you are thinking when you say they spent it.
But it is important to keep in mind that none of the payments can be traced to specific taxes or bond sales. You can’t say “these taxes over here were then spent on this program over there”, because money is fungible. Once a tax dollar is collected, it just goes into the pool and can’t be traced. So it is logically meaningless to say they “spent it” (the FICA taxes) because there is no identifiable “it” in the spending.
I’m afraid you are missing the point. All of this stuff about SS “holding Treasuries” in “a lockbox” and “SS running out of money” is intended to make you think that SS is an annuity. But it is NOT AN ANNUITY. Not in any sense of the word. The SS fund can’t run out of money, the way an annuity can, because it isn’t a fund. It can no more run out of money than the food stamp program or any other welfare program can run out of money. They can spend as much or as little as they want to on SS each year; there are no rules except the rules Congress makes.
Yes, OK, it’s true that they don’t have to vote the amounts every year, BECAUSE THEY VOTED NOT TO HAVE TO: that is the only reason. They can change that law they same way they passed it: by voting on it.
What they do each year is send out checks to people, according to however much your elected representatives decide to spend that year. They picked whatever they wanted to pick as an amount, and next year they can pick a different amount: THERE IS NO ANNUITY. THERE ARE NO ASSETS. If you get money one year it is simply because Congress wanted to send it to you, NOT because you have a legal claim to it, as you would if it were an annuity, a pension fund, a life insurance policy, or personal savings.
O.K. this is all over my head. My point was I thought they stuffed some of it into the general fund. And I should have put “annuity” in quotes, because I get that.
That is the problem. They can’t stuff it into the general fund. There isn’t a general fund to stuff it into.
The federal government is a black box. All it can do is
99% of politicians, media reporters, the general public, and Ricochet friends will explain it this way.
“Government accountants inside that box move it from one drawer to another drawer, all of these drawers being inside the black box.”
Ask them how that changes any of these things:
You will find that the answer is, “well, actually, it doesn’t change any of those things, now that I think about it!”
Then ask, “Why should I care, then?”
The answer is, you shouldn’t. Pretending that one of these boxes is a “fund” in the sense of “a set of financial assets” isn’t changing the facts.
FICA is a fiction. The concept of a payroll tax is a fiction. This stuff was out of control from day one.
Given that the TIPS produce more income the higher inflation goes, what do you think of this solution? Have the Fed buy lots of TIPS and fixed interest securities on the open market.
This would have two effects.
First it would increase the money supply, which would increase inflation, increasing tax receipts. The government would have more and more money to pay back the fixed interest debt each year.
Second, the increased inflation would mean that the interest payments on the securities would go up. With the Fed owning them, this would go straight to the bottom line of the Fed. The Fed pays 100% of its bottom line to the US Govt. The Government could use the big gains in revenue to pay back the loans quickly.
I love that. It cuts deficits by 10% right now.
Now the Fed is supposed to sell. Congress is clueless.
#GOSPLAN