About the Debt Default Clock

FIVE MINUTES TO MIDNIGHT: ANNOUNCING THE “FEDERAL GOVERNMENT DEBT DEFAULT CLOCK”

The Default Clock Committee

Beyond the troubling debt-ceiling standoffs we witness every few years, looms a far more dire threat: a true U.S. government default, which economists warn could lead to a collapse of confidence in the American economy, a run on the dollar, and perhaps even a global economic meltdown.

How close are we to such a catastrophic federal default?

To answer this question, a group of private-sector economists and fiscal policy experts has formed a citizens’ committee, called the Default Clock Committee, to maintain an objective, fact-based Federal Government Default Clock. The Clock is designed to help the public to see and track the nearness of the danger.

For the Committee’s purposes, “default” is defined simply as a failure by the U.S. Treasury to make a scheduled interest payment on just one direct U.S. Government obligation such as a Treasury note or bond. “Insolvency” is defined as the point beyond which default becomes a virtual certainty.

Since 2013, Congress has gotten into the habit of temporarily suspending the government’s statutory debt ceiling, for a year or two at a go, during which time the Treasury may incur unlimited amounts of debt. This practice is dangerous. Repealing the debt ceiling does not repeal the threat of a default. Indeed, to think that it would or could is akin to thinking we can be assured of perpetually sunny days if we simply destroy the barometer! Congress seems to be telling itself: “If I just increase the credit limit on my credit card, I will never have to pay it off!”

The debt ceiling is our most important fiscal barometer, and we hope our new Default Clock will help the public to read that important gauge more easily, by showing us in a clear and simple way how close we are to midnight. Its purpose is to spur fiscal policy makers to change course before it’s too late.

The Ten Tests

The Clock continuously measures ten of the most relevant budget factors, or tests, each of which is framed as a simple yes-no question. At any given moment, the status of the ten factors collectively determines the number of minutes from midnight the Clock stands at any point in time. The number of minutes, of course, changes as time passes and new data is received. Each factor assesses, not just where things currently stand, but also where things are projected to move over the course of the next ten years. Each of the ten tests is objective. None is arbitrary or influenced by opinion.

Here are the ten factors:

  1. Do federal outlays exceed 17.5 percent of gross domestic product (GDP)?
  2. Is there a U.S. dollar-denominated debt ceiling in law presently, and will the projected federal debt stay below that ceiling during the ten-year budget period?
  3. Does the gross federal debt exceed 100 percent of GDP?
  4. Do gross federal interest payments exceed 15 percent of federal revenues?
  5. Do gross federal interest payments, on a sustained basis, exceed 80 percent of the money the federal government brings in through the issuance of new debt?
  6. Does the ratio of debt held by the public exceed 80 percent of the gross debt?
  7. Is the debt held by the Federal Reserve below 15 percent of the debt held by the public?
  8. Does debt held by foreigners exceed 50 percent of the debt held by the public?
  9. Does the share of the debt held by the public in the form of Treasury inflation-protected securities (TIPS) exceed 15 percent?
  10. Do federal revenues fall below 17.5 percent of GDP?

While economists and financial experts will readily appreciate the relevance of each of these factors, we realize that the lay reader may find them confusing. For everyone’s benefit, the Default Clock Committee has published, at https://debtdefaultclock.us/ , a detailed, plain-English explanation of each factor, together with all of its underlying data and assumptions.

Warning: Default Ahead

The United States will reach insolvency—the point of no return—when the federal government fails at least eight of the ten factors or tests listed above. As of right now, the federal government is currently failing four of them. These are Factors 1, 2, 3 and 10, but one (Factor 10) is projected to right itself. The remaining six are passing now, but are projected to fail sometime during the 10-year budget period. As of today, the Federal Government Default Clock stands at just five minutes from midnight.

If the federal government remains on its currently projected fiscal trajectory, the more politically difficult and economically painful our choices become as time passes.

The Default Clock is ticking.

Databases behind the nine factors of the Federal Government Default Clock

Factor #1:

Congressional Budget Office, “Budget and Economic Data,” under the headings “Historical Budget Data/ Revenues, Outlays, Deficits, Surpluses, and Debt Held by the Public Since 1967” and “10-Year Budget Projections/CBO’s Baseline Budget Projections, by Category,” June 2017, here. There is no formula for this factor because CBO provides the figures directly.

Factor #2:

Office of Management and Budget, “Historical Tables,” Table 7.1, May 2017, here Congressional Budget Office, “Budget and Economic Data,” under the headings “10-Year Budget Projections/Federal Debt Projected in CBOs Baseline,” Table 5, June 2017, here; Congressional Budget Office, “Budget and Economic Data,” under the headings “10-Year Economic Projections/June 2017 Baseline Projection – Data Release (Fiscal Year),” here. This data is used in the following formula: gross federal debt ÷ gross domestic product = % of gross domestic product.

Factor #3:

Department of the Treasury, “Interest Expense on the Debt Outstanding,” here (accessed January 18, 2018); Congressional Budget Office, “Budget and Economic Data,” under the headings “Historical Budget Data/“Historical Budget Data/ Revenues, Outlays, Deficits, Surpluses, and Debt Held by the Public Since 1967” June 2017, here; Congressional Budget Office, “Budget and Economic Data,” under the headings “10-Year Budget Projections/CBO’s Baseline Budget Projections by Category” and “Spending Projections by Budget Account (specifically Line 1682, “Interest on Treasury Debt Securities (gross)”), January 2017, also here. This data is used in the following formula: gross federal interest costs ÷ federal revenues = % of federal revenues.

Factor #4:

Office of Management and Budget, “Historical Tables,” Table 7.1, May 2017, at here; Congressional Budget Office, “Budget and Economic Data,” under the headings “10-Year Budget Projections/Federal Debt Projected in CBOs Baseline,” Table 5, June 2017, here; Department of the Treasury, “Interest Expense on the Debt Outstanding,” here (accessed January 18, 2018); Congressional Budget Office, “Budget and Economic Data,” under the headings “10-Year Budget Projections/CBO’s Baseline Budget Projections by Category” and “Spending Projections by Budget Account (specifically Line 1682, “Interest on Treasury Debt Securities (gross)”), January 2017, also here. The data is used in the following formula: gross interest costs in year z ÷ gross debt at the end of year z – gross debt at the end of year y = percent of new debt. Please note that after reviewing the data in more depth, I re-set the threshold at 70 percent as opposed to 80 percent.

Factor #5:

Office of Management and Budget, “Historical Tables,” Table 7.1, May 2017, here; Congressional Budget Office, “Budget and Economic Data,” under the headings “Historical Budget Data/ Revenues, Outlays, Deficits, Surpluses, and Debt Held by the Public Since 1967” and “10-Year Budget Projections/CBO’s Baseline Budget Projections, by Category,” June 2017, here. The data is used in the following formula: debt held by the public ÷ gross debt = percent of gross debt.

Factor #6:

Here; here. The historic data is used in the following formula: debt held by the Federal Reserve ÷ debt held by the public = percentage of debt held by the public. The formula for the projected data is the same, but the data assumes the Federal Reserve will draw down its share of the debt held by the public by simply maintaining the dollar value of its debt at current levels. This approach permits the Federal Reserve to return its holdings as a share of the debt held by the public to about the levels of 2008 on a gradual basis.

Factor #7:

here, under the heading “Ownership of Federal Securities;” here; here. The historic data is used in the following formula: the dollar value of the foreign-held debt ÷ the debt held by the public = percentage of debt held by the public. The formula for the projected data under this factor is: the dollar-level of foreign-held debt based on the average annual rate of increase in these holdings from the historic data ÷ the projected debt held by the public = the percentage of debt held by the public.

Factor #8:

Here; here. The historic data is used in the following formula: the dollar value of TIPS outstanding ÷ debt held by the public = the percentage of debt held by the public. The projected data is used in the following formula: the dollar value of the TIPS outstanding based on a 15 percent annual rate of increase ÷ by the projected debt held by the public = percentage of debt held by the public.

Factor #9:

Here; here; There is no formula for the historic data under this factor because OMB provides the amounts directly. The projected data is used in the following formula: the dollar-level revenues projected in the June 2017 CBO baseline – the loss of revenues projected by CBO in its assessment of H.R. 1 ÷ projected GDP = percentage of GDP.

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