Treasury Secretary Jack Lew has warned that the U.S. will hit the debt ceiling on October 17.
And this has much of the news-following world confused and totally freaked out that the U.S. will default on its obligations this Thursday.
To clarify, the debt ceiling is when the U.S. Treasury will no longer have the authority to borrow money by issuing bonds. However, it will still have around $US30 billion in cash to continue financing its obligation. It’s only after that cash runs out that we have to start worrying.
But Lew’s communication of the debt ceiling may have helped ignite a sense of urgency that something must be done sooner than later.
Reinhart argues that this was actually an important contribution Lew made to the whole debt ceiling debate. From Reinhart’s note:
Sleight of Hand with Secretary Lew
Secretary Jack Lew’s main contribution has been to convince legislators that a soft date is scarily hard, keeping politicians negotiating in advance of what they believe is the crack of doom. What the Treasury has explained is that on October 17th, it will only have $US30 billion in cash in its account at the Federal Reserve, it will have exploited all extraordinary measures for which there is precedent, and that it will not consider schemes to protect coupon and principal payments at the expense of other Treasury claimants. There are multiple qualifiers in that statement, the most important of which is that the Treasury anticipates still having cash. Default is the event pressed upon the Treasury when the risk materialises of over-drafting at its fiscal agent, the Federal Reserve, which cannot lend directly to the Treasury. With cash still expected in the till, October 17th is really not the event horizon, even before considering expanding the frontier of extraordinary measures before or on that day.
So, the secret’s out. October 17 is not the drop-dead date.