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The U.S. reached debt limit in March here's the clever accounting preventing default
U.S. Treasury Secretary Jacob Lew said Thursday that the U.S. will run out of money by Nov. 3, much earlier than Congress expected. The exact date is hard to predict largely because of the unorthodox means by which government is avoiding default. - photo by Daniel Bendtsen
U.S. Secretary of Treasury Jacob Lew sent a letter to Congress last week, warning lawmakers that the government will run out of cash no later than Nov. 3, if the debt ceiling is not raised.

That surely sent blood pressure soaring the Congressional Budget Office had predicted that the debt limit would not be reached until at least mid-November, possibly as late as early December.

With the uncertainty over Republican leadership in the House, John Schoen of CNBC predicted the debt crisis could get "really ugly."

"And just like a credit card borrower who doesn't pay on time, delayed payments will cost the government more in what amounts to late fees in the form of interest penalties on unpaid bills," Schoen said, indicating that a default could lead to higher interest rates, costing up to $75 billion each year.

Predicting when Treasury will run out of money is hard largely because Lew and his team have been running on fumes for most of 2015.

The federal government often racks up $100 billion in debt in a month. Yet since March, the government has been able to maintain a steady balance at exactly $25 million short of the $18.113 trillion debt limit.

To do this, the Treasury has found a number of cash management tricks. Lew calls them "extraordinary measures."

The Treasury manages a stockpile of about $100 billion in foreign assets for the purpose of currency stabilization. If the value of the Yen is imbalanced, the Treasury can buy or sell Japanese securities to reach the desired effect. But with the debt at its limit, the government is liquidating many of these assets to pay its obligations.

But the biggest source of emergency funding comes from money invested in two public savings plans: Lew's team is drawing money from the government's G Fund, a $193 billion retirement fund for federal employees, as well as money in the Postal Service's pension. The securities in these funds mature each day, and the government has the option of whether or not to reinvest. Since March, the Treasury has been slowly spending all of it.

Ultimately, these measures amount to nothing more than a macroeconomic version of digging under the couch cushion for spare change.

This money eventually dries up, and Lew says that day is only weeks away. Once the debt ceiling is inevitably raised, the government will actually end up paying more, reinvesting the money that was previously in the pensions and G Fund, plus paying for the missing interest that would have accrued since March, according to the Bipartisan Policy Center.

In 2011, political theater prevented the debt ceiling from being raised until the day before the Treasury ran out of money. The uncertainty had consequences for the world economy, and in response, the S&P 500 downgraded the U.S. from a perfect credit rating for the first time in the country's history, Reuters reported. More agencies further downgraded the U.S. when debt ceiling drama was resurrected in 2013.

Raising the debt ceiling only allows the Treasury to meet the financial commitments under a congressionally approved budget it doesn't allow the federal government to approve more deficit spending.

This is a distinction that sometimes confuses even presidential candidates. In an interview with Market Place's Kai Ryssdal, Republican presidential hopeful Ben Carson responded four times to questions about whether he would allow the government to default on its debt by talking about an unbalanced budget.

"I would provide the kind of leadership that says, 'Get on the stick guys, and stop messing around, and cut where you need to cut, because we're not raising any spending limits, period," Carson said. Ryssdal eventually gave up.

Historically, Congress had to approve each individual new line of credit for the Treasury. However, to more efficiently fund World War I, Congress created the debt ceiling in 1917 so the Treasury could take out debt up to a predetermined limit.
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