In my post yesterday, I mentioned in passing the uncertainty about when we would again hit the debt limit (“X Date”). The question is complicated. Yesterday’s agreement extends the debt limit until February 7, and it allows the U.S. government to replenish or repay the extraordinary measures that it took in order to finance the deficit from May until yesterday.
Alec Phillips at Goldman Sachs suggests that the extraordinary measures this time might only get us to sometime in March, but it’s also possible to project a new X Date of May, June or July.
- Treasury revenue is highly volatile in the early months of the year—February and March are “bad” months, April a “good” month as tax payments come in.
- The deficit will be materially lower next year on spending restraint and higher revenue due to growth and a strong stock market.
- Extraordinary measures available depend on the time of year. In past years there were about $200 billion in extraordinary measures available in February (mainly from suspending investments in the federal employees investment fund, or G-Fund, and the Exchange Stabilization Fund). In contrast, the measures reached $300 billion in May 2013.
- The amount of extraordinary measures available also can be increased by deferring certain debt rollovers and interest payments normally due to government funds at end quarter, and by extending the length of the period for which special measures are used (the Debt Issuance Suspension Period, or DISP). If Treasury is assuming a March X Date, it may mean that they are assuming a short DISP, but they can and likely would extend the DISP to gain more time.
- In addition, at some point Freddie Mac is expected to make a dividend payment to Treasury, perhaps on the order of $30 billion, which could add to the resources available to Treasury.
The chart above shows the cumulative deficit of the U.S. government starting February for the last four years. (I took three-fourths of the reported monthly February deficit to approximate a February 7 start date.) It shows that 2013 looks a lot different from previous years, which reflects a falling deficit and also some of the effects of the fiscal cliff at end 2012. But if we assume that 2014 looks broadly like 2013, only with a smaller deficit, then you can see a story where the X Date is pushed off to April 15, and then until summer.
When the debt limit hits could be important for both political and economic reasons, coming in the midst of primary campaigns for the 2014 midterm elections. Proximity to the X Date also would make it hard for the Fed to make decisions on tapering asset purchases, which some believe could be on the table at their March 19-20 monetary policy meeting. Perhaps the debt limit will be addressed in the December spending negotiations. I hope so. But if those negotiations fail, as have past efforts at grand bargains, then we may be facing another debt limit showdown in 2014. My intuition is that, to the extent Treasury is able to push back the X Date, it should do so. Using the debt limit as leverage for a political or economic agenda is dreadful at any time, but seems less likely to result in a cliff hanger the later in 2014 it is addressed.
This piece is cross-posted from Macro and Markets with permission.