With the debt ceiling in place, the Treasury is using “extrodinary” measures to keep the Government funded
This article first appeared on SchiffGold.
The Treasury bumped up against the debt ceiling at the end of July. Since then, it has been using “extraordinary measures” to allow the Government to keep hemorrhaging cash without having to increase the debt ceiling.
The chart below shows the month over month change in debt for August equal to $0. Despite zero net change, there are two important facts to highlight.
Figure 1: Month Over Month change in Debt
The conversion of short term to long term has been covered in previous articles, so let’s review the change to Nonmarketable.
Over 95% of Nonmarketable debt is intragovernment holdings (i.e. debt the Government owes to itself such as Social Security). The 5% ($250B) of Nonmarketable held by the public is in the Federal Retirement Thrift Savings Plan (TSP). This is the 401k equivalent plan offered to Government employees. Got that? The only part of Nonmarketable debt held by the public is held by Government employees in their retirement plan. And who administers this plan? That’s right, the Government.
So what happens when the Treasury bumps up against the debt ceiling? They suspend investments into the G Fund which invests in Treasury securities. The Government still guarantees the returns, but this prevents the plan from investing in Treasuries.
The chart below shows the amount of Nonmarketable Treasury Debt held by the TSP historically. As can be seen, the amount grows steadily overtime, but collapses to zero periodically. This occurs in tandem with other debt ceiling limits.
Figure 2: Retirement Fund
The G Fund has maturity that lasts from a few days to 52 weeks. This means the Treasury stops rolling over funds into the Nonmarketable securities and it provides room for the Treasury to issue debt elsewhere.
This is not the first time the trick has been used. As the chart shows, during past debt ceiling sagas the Treasury targets this specific fund to gain immediate relief from the debt ceiling. Why do this? In theory, this should have no net impact on Government funds. Cash is returned to the G Funds and is raised by issuing public debt such as Bonds, Notes, and Bills. Net zero impact. The Government shouldn’t care where the cash is coming from, so why the extra step here?
What appears more likely is that the Government borrows the cash, using the G Funds guarantee as collateral. As the G Fund matures, it clears up room in the debt ceiling but also gives the Government the cash that should have been invested in G Funds. Essentially it becomes shadow debt on top of debt. The equivalent would be your friend giving you an IOU for $100, then asking for that IOU back so they could give it to someone else but promising to return the IOU at some later date. A verbal promise replaces a paper promise.
To be clear, I am a data analyst not an accountant, but this is the most logical reason for performing this “extraordinary” maneuver. If this was not how it unfolded, then it would not make sense to perform this trick. If this in fact the case, then this is not a suspension but a complete raid of Government employee retirement accounts.
Thus, this accounting trick immediately frees up $250B in “debt ceiling space”. Freeing up this space allows the Government to keep the retirement cash but then issue new debt to the public in the form of Notes and Bonds. What a privilege! As shown in Figure 1 above, $324B of new medium-long term debt was issued in August. Using the Government retirement plan and allowing $100B in short term Bills to mature gave the Treasury this wiggle room to issue this debt.
In addition to the TSP accounting trick, the Treasury also relied on its cash balance. Based on the trajectory of the cash balance depletion shown below, it is quite obvious Yellen did not want a large cash balance heading into the debt ceiling saga. This forces the hand of Congress to act more quickly to get the debt ceiling raised.
Someone without political motivations would have used the debt ceiling suspension to build up a war chest of cash to keep the Government funded for an extended period of time. The argument could be made this would disrupt financial markets as new US Debt would not be issued for an extended period of time, but there is still plenty sloshing around and rolling over each month (see charts below).
Thus, instead of doing what one would expect, Yellen did the opposite, allowing the cash balance to deplete into the debt ceiling saga (from $1.6T in January to $555B on Aug 2nd). The remaining cash is going quickly. As of Sept 3, the balance has shrunk to $262B. This represents a nearly $300B cash draw down in one month.
Considering more than $500B of cash was burned in August alone ($250 from TSP and $300 from cash balance), it becomes clear why Yellen has said the Treasury will run out of cash by October. At such a high burn rate, “extraordinary measures” run out quickly.
Figure 3: Treasury Cash Balance
In August, the Treasury accessed over $500B in funds despite having a hard limit on the debt ceiling.
Perhaps more alarming is the speed of the TSP draw down. In past instances, the draw down has occurred over a few months, in the most recent period the entire draw down occurred in one month similar to 2019 (only larger this time). The speed at which “extraordinary measures” has exhausted options, shows just how much more the Government is spending per month now compared to years past. An analysis of the monthly Federal Deficit can be found here.
To reiterate, this is not money saved or a reduction in spending as the debt is reissued the moment congress lifts the debt ceiling (also shown in the rapid rebounds). Furthermore, I am not making the case Government employees will be left holding the bag. The G Fund guarantees that Government employees will be made whole and is considered the safest investment in the TSP. That being said, I would not be too happy if this trick was played with my retirement account.
Because the debt ceiling has been reached, the normal tables and charts show little change compared to last month. The data has been shown below but the analysis will be saved for when the debt ceiling is lifted.
Monthly Change in Debt with % Comparison | Trailing Twelve Month (TTM) Comparison | ||||||||||
Category | Current Balance | Aug 2021 | Jul 2021 | TTM Avg Monthly | MoM % Change | TTM % Change | TTM Ending | TTM Ending | TTM Ending | TTM | TTM |
Bills | |||||||||||
< 6 month | 2,687.0 | -175.8 | -215.2 | -83.2 | -18.3% | 111.2% | -998.8 | 2,146.9 | 107.0 | -146.5% | -1,000.0% |
6-12 months | 1,351.1 | 71.8 | 82.3 | -3.3 | -12.7% | -1,000.0% | -39.8 | 597.9 | -116.0 | -106.7% | -65.7% |
Notes | |||||||||||
1-3 years | 2,475.7 | 130.4 | -33.1 | 69.2 | -493.6% | 88.4% | 830.4 | 451.5 | -11.9 | 83.9% | -1,000.0% |
3-7 years | 5,120.1 | 63.2 | 67.5 | 68.7 | -6.5% | -8.1% | 824.6 | 218.7 | 181.8 | 277.1% | 353.6% |
7-10 years | 4,816.1 | 33.3 | 44.3 | 19.4 | -24.7% | 71.8% | 232.8 | 197.4 | 366.2 | 17.9% | -36.4% |
Bonds | |||||||||||
10-20 years | 428.8 | 56.7 | 0.0 | 28.4 | -1,000.0% | 99.3% | 341.3 | 87.5 | 289.9% | ||
20-years+ | 2,865.2 | 29.5 | 28.0 | 27.4 | 5.7% | 8.0% | 328.3 | 233.9 | 190.2 | 40.3% | 72.6% |
Other | |||||||||||
Nonmarketable | 6,495.1 | -234.1 | -61.2 | -3.6 | 282.2% | 1,000.0% | -43.0 | 223.9 | 157.1 | -119.2% | -127.3% |
Other | 2,188.1 | 24.5 | -14.1 | 18.5 | -273.5% | 32.3% | 222.6 | 110.6 | 127.2 | 101.3% | 75.0% |
Total | |||||||||||
Total | 28,427.2 | -0.5 | -101.5 | 141.5 | -99.5% | -100.4% | 1,698.4 | 4,268.3 | 1,001.6 | -60.2% | 69.6% |
Data as of: Aug 2021. % Changes are capped at 1,000%. | |||||||||||
Figure 4: Monthly Rollover
Figure 5: Short Term Rollover
Figure 6: Treasury Note Rollover
Data Source: https://www.treasurydirect.gov/govt/reports/pd/mspd/mspd.htm
Data Updated: Monthly on fourth business day
Last Updated: Aug 2021
US Debt interactive charts and graphs can always be found on the Exploring Finance dashboard: https://exploringfinance.shinyapps.io/USDebt/