Can Treasury just go overdrawn at the Fed?

By Felix Salmon
July 27, 2011

John Carney has an intriguing post today: what if, in the short to medium term, the debt ceiling really doesn’t matter at all?

This is nothing to do with the 14th Amendment or with coin seignorage — this is just the simple mechanics of bank accounts. Treasury has an account at the Fed; at last count it was in credit to the tune of roughly $77 billion. Money’s coming in; money’s going out. Come August 2, it’ll be down to zero. But hey, zero’s just a number. We’ve all gone overdrawn at our bank at some time or another: why should Treasury be any exception?

The idea here is that after August 2, Treasury can simply carry on with business as usual. Money will come in to its bank account; money will go out. And the balance will dip below zero: Treasury will have an overdraft at the Fed. You think the Fed’s going to bounce Treasury’s checks?

The question is whether the overdraft counts as national debt for the purposes of calculating the debt ceiling. And Carney thinks there’s a good case to be made that it doesn’t:

The debt ceiling applies to the face amount of obligations issued under Chapter 31 of Title 31 of the U.S. Code—basically, Treasury notes and bills and the other standard kinds of government debt—and the “face amount of obligations whose principal and interest are guaranteed by the United States Government.” But overdrafts on the Federal Reserve wouldn’t be Treasurys and they aren’t explicitly guaranteed by the U.S. government.

There’s no reason why this state of affairs couldn’t continue for months. Treasury would continue to spend money, as instructed by Congress in the budget, and Treasury’s overdraft at the Fed would continue to rise. The Fed, for its part, would have two choices when it came to cashing Treasury’s checks: it could either simply print the money, or else it could sell some of its assets — it owns $1.6 trillion in Treasury bonds — and use those proceeds instead. Either way, any bank presenting a check from Treasury could cash it, no problem.

This seems to me by far the most elegant solution to the debt-ceiling problem, should Congress not get its act together by August 2. Treasury just keeps on spending, and the Fed would of course continue to honor the checks: failure to do so would trigger a massive recession and directly violate its full-employment mandate, for starters. There would be people saying that the Fed overdraft should by rights be included in the total national debt, but they would have no particular standing to try to get that point of view enforced by a court of law.

And of course if Treasury has a back-up overdraft facility at the Fed, that would only serve to shore up — rather than endanger — its precious triple-A credit rating.

So, have at it, people. Why isn’t this the first best solution to the debt-ceiling problem, should we find ourselves in that dreadful situation?


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“Why isn’t this the first best solution to the debt-ceiling problem..”
It’s currently illegal, the fed is not allowed to do direct monetary financing of the government, this would require express permission of Congress (it has been done before i.e wwII).
Get over it, the power of the purse rests with congress and no sane secretary of the treasury is going to break the laws of the land to save the us from congress’s own stupidity.

Posted by alea | Report as abusive

if it’s illegal, what is the law?

If it’s illegal, wouldn’t the House Republicans then have to bring suit to force the Fed to stop crediting the Treasury? Good luck with that.

Posted by johnhhaskell | Report as abusive

It’s a terribly pragmatic solution to a dogmatic problem. The outcome is to allow markets and economies to proceed without fallout, encouraging continued adherence to strict, conservative, economic dogma.

Default MUST occur to identify the false prophets of libertarian economic theology, so that they may be tarred and feathered — do you really want to bail out conservatives from their dogma, only to see this hostage-ransom event repeated?

Posted by GRRR | Report as abusive

read the constitution (art 1, section 8).
in the previous occasion where direct monetary financing occurred it was as a direct result of exemption made by congress, the POTUS or the secretary of the treasury have NO power to borrow on the credit of the US, whether from the public or the fed.

Posted by alea | Report as abusive

I heard a great and very apt quote from a NYSE trader last night “Our politicians are stupid, we’ve just had a letter from the Philippines telling us to sort out the Dollar – what’s next? Ethiopia telling us how to grow crops?”

The Dollar is falling rapidly in value against other world currencies, and the T Party want more tax cuts? There’s an old saying – “You get the politicians you deserve”. After all, you choose them…

Are there really so many people who hate America’s first Black President so much? The US really needs to get its race issues sorted out. There are too many selfish people in powerful positions who are thinking of themselves ahead of their country.

Posted by FifthDecade | Report as abusive

It wouldn’t be the Treasury borrowing, it would be the Fed. The question is whether this is borrowing. With no instrument, it is not clear it is. The Fed could as well be deemed to be printing it and the Fed is a creature of Congress, not the Executive. If they are dissatisfied, they would have to make law.

Another alternative is the Executive is empowered under an obscure 1996 law to coin some precious metals and could coin and deposit a few $1T platinum coins with the Fed so no negative balance. Now that would be real debt reduction.

The problem with the debt limit is it is defective as stands since it has no means of implementation, and could be declared as such and ignored. I tend to agree with GRRR though, it might be better to not save Congress from itself.

Posted by MyLord | Report as abusive

Congress has not given the Fed the authority. Check out the GAO report linked below:

See p.37 on.

Fed has a mandate to protect the payment system so this might not be out of the question, but given the legislative history and Congress’ decision not to renew this authority it would likely be stretching the law.

Posted by arthurks1 | Report as abusive

@ Alea, is it your position that additional borrowing by the Fed would fall under Article 1 Section 8?

Second, how can the Congress pass an exemption to the Constitution? I thought that required a Constitutional Amendment. If there was a WWII exception to Article 1 Section 8 by Act of Congress that would indicate that someone thought Article 1 Section 8 wasn’t the relevant law in this case.

Posted by johnhhaskell | Report as abusive

Seems to me that every single penny that the treasury spends has been authorized and funds appropriated by Congress. In effect, the President has a legal obligation to spend the money as set forth in the authorization/appropriation process. Now he is faced with conflicting laws — one requiring him to write the checks, and another one prohibiting him from borrowing money to do so. Catch 22. When faced with conflicting laws, the President should seek to take action that does least damage to the country.

Posted by cajunjoe | Report as abusive

Seems to me that every single penny that the treasury spends has been authorized and funds appropriated by Congress. In effect, the President has a legal obligation to spend the money as set forth in the authorization/appropriation process. Now he is faced with conflicting laws — one requiring him to write the checks, and another one prohibiting him from borrowing money to do so. Catch 22. When faced with conflicting laws, the President should seek to take action that does least damage to the country.

Posted by cajunjoe | Report as abusive

Felix, I discussed this option in a July 18 post: ome-thoughts-on-unthinkable.html

It can be done, and it’s better than the alternative of failing to make good on spending commitments, but it could lead to impeachment. See also here: 1/07/are-rebuplicans-trying-to-get-obama .html

Posted by rajivsethi | Report as abusive

previous “overdrafts” of the treasury at the fed were authorized by congress. what i mean by exemption is that monetary financing (“overdrafts” at the fed in the treasury account) has happened before and was authorized by congress (and subject to the debt ceiling).

Posted by alea | Report as abusive

johnhhaskell: It’s true that overdrawing the Treasury’s account at the New York Fed is implicit money creation that you can interpret as borrowing by the Fed, but on the other side of the ledger it is also either a loan or a gift to the Treasury, neither of which the Fed has the power to make.

And if it’s a loan to the Treasury, that’s doubly suspect because Congress has not authorized the Secretary of the Treasury to borrow money in that way, whether or not such a loan is subject to the debt ceiling.

Posted by guanix | Report as abusive

Felix: This is Banana Republic logic. This is what the U.S. is being reduced to – gimmicks to keep itself solvent. Gimmicks that in all likelihood simply spit on the former respectability of the Republic in the eyes of the world.

If we implement a hare-brained scheme like this to keep solvent, and if the credit ratings agencies, by some miracle, don’t declare an immediate default because we’re violating every principle of respectable finances, then what do you think the rest of the world (ie, global investors) are going to think about how safe treasuries are?

This assinine option would showcase the U.S. as a desperate, dishonest, rapidly declining sovereign that would use any trick to stay afloat. Banana Republic.

I’ve lost a lot of respect for you, Felix. You should NEVER have hosted this moronic piece.

Posted by NukerDoggie | Report as abusive

There really isn’t anything in the law covering this. Yes, Congress previously regulated direct draws by the Treasury, but this wouldn’t be a direct draw and the Fed would have to deal with it as it sees fit. Yes, the Fed can’t loan or give but that just establishes the absurdity of the debt limit and they would have to decide what to do. It really wouldn’t be any different than declaring the limit null and void. Most likely there would be an attempt to impeach. When you are in the Queen of Hearts court nonsense rules.

Posted by MyLord | Report as abusive

Creating money like that from nothing really would be directly 1-to-1 inflationary in the way that gold-bugs and the economically illiterate always hoped QE would be.

Posted by BigBadBank | Report as abusive

I have been blogging for this solution for some time.  /07/presidents-plan-for-avoiding-defaul t.html

I an not a lawyer but I believe it would be legal even by statute but more certainly so thanks to Section 4 of the 14th Amendment. Indeed, I believe the actions I recommend are not merely permissible, to avert a default they would be mandatory.

Posted by Adam_Smith | Report as abusive

cajunjoe’s solution is the right one in my opinion. If there’s a conflict between two statutes, it’s not clear which one wins. The President can determine which one to honor. If someone doesn’t like it they can sue and the courts can decide. In my opinion, the apppropriations bills should probably win and be considered an implicit repeal of the debt ceiling (since they were passed later) to the extent necessary to satisfy the appropriations.

Posted by DaDaDan | Report as abusive

continuously i used to read smaller posts which also clear their motive, and that is also happening with this paragraph which I am reading at this time.