Fiscal Cliff 2013: With Debt Limit Near, Geithner Takes "Extraordinary" Action to Buy Time

In a letter to congressional leaders Wednesday, Treasury Secretary Timothy Geithner said the government will hit the $16.4 trillion debt limit on Dec. 31.

In order to postpone that violation, Geithner will be taking “extraordinary measures,” (i.e. suspending government reinvestment) to “create approximately $200 billion in headroom,” which may last up to two months. Some of these measures are complex, but here is an overview of what the Treasury Department will be doing to buy our government up to two months of needed time:

1) Suspend Issuance of State and Local Government Securities - $8 to $34 billion

This move ends certain loans, known as SLGS or “slugs,” to state and local governments. Slugs allow these governments to invest in the marketplace.

Ending these loans will effectively take billions of dollars out of the market and decrease liquidity. Slugs have been suspended several times over the last 20 years to avoid hitting the debt ceiling.

2) Declare a “Debt Issuance Suspension Period” - $12 to $28 billion

The Treasury will seek to suspend new investment in the Civil Service Retirement and Disability fund and the Post Service Retiree Health Benefits fund. It also requires repayment of debt from these funds to the treasury. After these actions have taken place to extend the debt ceiling, “the U.S. government will be limited in its ability to make [civil service benefit] payments across the government.”

This essentially means that funds for retired and disabled federal or post service employees will be decreased until “the debt limit impasse has ended.” After this time period, the Treasury will restore lost interest on securities held by these funds. But until the debt ceiling is raised (or federal debt is decreased), this action could mean decreased payments to the retired and the disabled. 

3) Suspend Reinvestment of the Federal Employees’ Retirement System Thrift Savings Plan - $156 billion

Congress has granted the Treasury the authority to suspend reinvestment of the “G Fund.” Payments from the G Fund to retired federal employees will be made until the debt limit is reached. Afterwards, the government will again “be limited in its ability to make payments."

Participants of this savings plan could be affected if we hit the debt ceiling, but before that time they would not be affected. All money lost to this fund due to Treasury measures will be restored after the debt ceiling is raised or once government debt is decreased to a level below the debt ceiling.

4) Suspend the Daily Reinvestment of the Exchange Stabilization Fund - $23 billion

This fund allows the Treasury to influence exchange rates without affecting domestic money supply. Some $23 billion of this fund will be lost due to suspending reinvestment and this $23 billion will not be reimbursed to the Treasury under existing law. The effect of this loss will be decreased government power over currency manipulation in the future.

In sum, these Treasury actions are by no means long-term fixes to our government’s growing debt problems, but they will buy lawmakers time to compromise on measures to decrease government debt, or raise the debt ceiling once again.