About the Debt Default Clock

FOUR MINUTES TO MIDNIGHT: THE REVISED “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. On September 10, 2018, the Review Committee announced significant revisions in the design of the Clock from its original version to make it more accurate. This announcement if found at: https://debtdefaultclock.us/wp-content/uploads/press-release-02a.pdf.

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 Twelve Tests

The Clock continuously measures twelve 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?
  11. Is the rate of real U.S. economic growth, as measured in GDP, at 3 percent or above on an annual basis?
  12. Has Congress enacted a law prohibiting the Treasury from resorting to “extraordinary measures” in the future?
  13. Is Congress scaling back programmatic “mandatory spending” and eventually phasing it out?

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 following is 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 ten of the twelve tests set according to the questions listed above. As of right now, the federal government is currently failing in seven of them. These are Factors 1, 2, 3, 8, 10, 11 and 12, but one (Factor 9) is projected to right itself before the end of the current ten-year budget period. The design of the Clock permits the Review Committee to discount up to two factors at any one time. The Committee is currently discounting Factor 9 in accordance with the design. The federal government is passing the remaining four tests now, but are projected to fail in all of them sometime during the 10-year budget period.

As of today, the Federal Government Default Clock stands at just four minutes from midnight.

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

The Default Clock is ticking.

Databases behind the nine factors of the Federal Government Default Clock

Factor #1: Do federal outlays exceed 17.5 percent of GDP?

The data associated with Factor #1 in the initial Debt Default Clock showed that federal outlays were already well above 17.5 percent of GDP, and peaked in the final year of the budget period (2027) at 23.6 percent of GDP. The updated version shows that in the final year of the current budget period (2028) outlays will remain at 23.6 percent of GDP. Thus, Factor #1 remains set at buying zero minutes from midnight. The data bases for this factor are as follows: 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 to 2017,” April 2018; and 2) “10-Year Budget Projections/CBO’s Baseline Budget Projections, by Category,” April 2018, here.

Factor #2: Is there a dollar-denominated debt ceiling in place, and if so, does the debt subject to limit stay under the ceiling during the budget period?

Currently, there is no dollar-denominated debt ceiling in place because the debt ceiling law has been suspended. Thus, Factor #2 also buys zero minutes from midnight. Accordingly, there are no data bases and graph associated with Factor #2 at this point. They will appear when a dollar-denominated debt ceiling is put back into place.

Factor #3: Does the gross debt exceed 100 percent of GDP?

Under the initial Default Clock setting, the gross debt peaked in the final year of the budget period (2027) at just under 110 percent of GDP. The current version shows that the gross debt will again peak in the final year of the budget period (2028) at over 113 percent of GDP. Since the gross debt exceeded 100 percent of GDP in 2012, and is projected to grow, Factor #3 will continue to buy zero minutes from midnight. The data bases for Factor #3 are as follows: 1) Office of Management and Budget, “Historical Tables,” Table 7.1, February 2018, here; 2) Congressional Budget Office, “Budget and Economic Data,” under the headings “10-Year Budget Projections/Federal Debt Projected in CBOs Baseline,” Table 5, April 2018, here; and 3) Congressional Budget Office, “Budget and Economic Data,” under the headings “10-Year Economic Projections/April 2018 Baseline Projection – Data Release (Fiscal Year),” also here.

Factor #4: Will gross interest costs exceed 15 percent of federal revenues?

In the initial Default Clock assessment, gross federal interest costs were projected to exceed 15 percent of federal revenues in 2020. The updated version here shows that gross interest costs will exceed 15 percent of federal revenues later this year and remain above this threshold. However, this remains an estimate. Accordingly, Factor #4 will continue to buy one minute from midnight. However, it is likely that Factor #4 will buy no minutes away from midnight at the time of the next assessment and force the Clock to four minutes from midnight. The data bases for this Factor are as follows: 1) Department of the Treasury, “Interest Expense on the Debt Outstanding,” at here (accessed April 12, 2018); 2) 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,” April 2018, here; and 3) 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)”), April 2018, also here.

Factor #5: Do gross federal interest payments, on a sustained basis, exceed 70 percent of the money the federal government brings in through the issuance of new debt?

The original version of the Default Clock estimated that the level of gross interest costs would exceed 70 percent of the money brought in by the issuance of new debt (in net terms) in 2023. The updated version shows the cross-over point should be reached in the same year. Thus, Factor #5 continues to buy one minute from midnight. The data bases for this factor are: 1) Office of Management and Budget, “Historical Tables,” Table 7.1, February 2018, at https://www.whitehouse.gov/omb/historical-tables/; 2) Congressional Budget Office, “Budget and Economic Data,” under the headings “10-Year Budget Projections/Federal Debt Projected in CBOs Baseline,” Table 5, April 2018, here; 3) Department of the Treasury, “Interest Expense on the Debt Outstanding,” here (accessed April 12, 2018); and 4) 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)”), April 2018, here.

Factor #6: Does the ratio of debt held by the public exceed 80 percent of the gross debt?

The original version of the Default Clock estimated that the debt held by the public would exceed 80 percent of the gross debt starting in 2025. This same year is the estimated cross-over point for Factor #6 under the updated Default Clock. Once again, this Factor will buy one minute from midnight. The data bases for this factor are: 1) Office of Management and Budget, “Historical Tables,” Table 7.1, February 2018, here; and 2) 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,” April 2018, here.

Factor #7: Is the debt held by the Federal Reserve below 15 percent of the debt held by the public?

The original version of the Default Clock showed that the federal debt held by the Federal Reserve would fall below 15 percent of the debt held by the public in 2020. The updated Clock moves this cross-over date up by one year to 2019. Accordingly, this Factor still buys one minute from midnight, but this could change in the next year or two and fail to buy any time from midnight. The data bases for this Factor are: 1) here; here, February 2018.

Factor #8: Does the debt held by foreigners exceed 50 percent of the debt held by the public?

The original version of the Default Clock showed that the share of the debt held by the public owned by foreigners would exceed 50 percent in 2021. The updated version of the Clock shows this Factor’s cross-over date remains 2021. Thus, Factor # 8 continues to buy one minute from midnight. The data bases for this Factor are: 1)here, under the heading “Ownership of Federal Securities;” 2) here (accessed on April 13, 2018); and 3) here, February 2018.

Factor #9: Are federal revenues below 17.5 percent of GDP?

The data bases for this Factor are found at: Congressional Budget Office, “The Budget and Economic Outlook: 2018 to 2028,” April 9, 2018, pp. 67 and 145, here. There is no formula for the projected data under this factor because CBO provides the amounts directly.

Federal revenues were at 17.3 percent of GDP in 2017. CBO projects they will fall to 16.5 percent in 2019, but grow to to the 17.5 percent of GDP in 2025 and exceed 18 percent of GDP before the end of the budget period. Given that Factor #9 is the only factor among the 12 that moves in the right direction over the course of the budget period, this factor is currently discounted by the Review Committee.

Factor #10: Does real rate of U.S. economic growth, as measured in GDP, meet or exceed 3 percent annually?

The data bases for Factor #10 are found at: 1) Bureau of Economic Analysis (BEA), Department of Commerce, here, Table 5 under “Tables Only,” under the heading “Gross Domestic Product” (historical data); 2) Congressional Budget Office, “The Budget and Economic Outlook: 2018 to 2028,” April 9, 2018, p. 140, here (projected data). There is no formula for either the historical or projected data on Factor #10 because BEA and CBO provide the data directly.

GDP grew at the rate of 2.3 percent in real terms in 2017. CBO projects will reach a rate of 3 percent in 2019, but will fall below 3 percent in each of the remaining years of the ten-year budget period. Therefore, Factor #10 currently buys no minutes from midnight.

Factor #11: Has Congress enacted a law prohibiting the Treasury from resorting to “extraordinary measures” in the future?

This is a purely qualitative factor. It adjusts the minute hand on the Debt Default Clock on the basis of the legislative actions or the lack thereof taken by Congress in the applicable legislative period. Therefore, there are neither data bases, nor formulas, nor graphs associated with Factor #11. Since current law permits the Treasury to undertake extraordinary measures, Factor #11 buys no minutes from midnight at this time.

Factor #12: Is Congress scaling back programmatic “mandatory spending” and eventually phasing it out?

The data bases for Factor # 12 are found at: the Congressional Budget Office, “The Budget and Economic Outlook: 2018 to 2028,” April 9, 2018, pp. 44 and 148, here. The formula for calculating whether mandatory spending is increasing or decreasing during the projected budget period under Factor #12 is: mandatory outlays – offsetting receipts ÷ $2.5 trillion (mandatory spending in 2017) = dollar level increase (decrease) in mandatory spending. If mandatory spending is projected by CBO to be at zero dollars before the end of the budget period, it will be considered to have been phased out.

Currently, mandatory expenditures are projected to increase during the budget period. Therefore, Factor #12 currently buys no minutes from midnight.

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