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What If the U.S. Defaulted on the National Debt?

Saturday May 23rd, 2015   •   Posted by Craig Eyermann at 3:30pm PDT   •  

pf_cover What would happen if the U.S. government defaulted on making payments on any portion of the $18.1 trillion it has borrowed?

That’s a question the Federal Reserve asked not so long ago, and just in case it ever might happen, the Fed created an emergency plan to deal with the situation. Reuters reports:

In a June 2014 letter to Treasury Secretary Jack Lew seen by Reuters on Monday, Republican Representative Jeb Hensarling of Texas said his staff had reviewed the Fed’s unclassified plans for how to handle a default. (

The plans included scheduling new payment dates for defaulted securities, Hensarling said in the letter which was also signed by Republican Representative Patrick McHenry of North Carolina.

The New York Fed, which carries out the will of the Fed in financial markets, would also conduct “business as usual” with regard to accepting Treasury securities as collateral, according to the letter….

In an effort to try to maintain calm on Wall Street, the U.S. central bank could lend investors money after taking Treasuries as collateral under so-called repo transactions, Hensarling said. The Fed also proposed “compensatory payments” for investors who were paid late.

In practice, the potential disruption to U.S. and global markets stemming from a hypothetical default by the U.S. government on its national debt would be minimized as the Fed would take over some of the U.S. Treasury Department’s role in ensuring that the full faith and credit of the U.S. government would be maintained by, in effect, insuring it.

But perhaps the most interesting aspect of the Fed’s emergency plans that Representative Hensarling revealed in his letter to the Treasury Secretary is that under the law, the U.S. Treasury may prioritize paying the holders of U.S. government-issued bonds and notes over other kinds of liabilities, such as government employee health insurance and pensions, which would avoid an actual default on the national debt altogether.

To put that more simply, the only reason that the U.S. Treasury would default on the national debt would be because it chose to put the interests of people like the bureaucrats who work in the federal government ahead of the interests of the people who loaned it the money it needs to sustain the excessive spending managed by the bureaucrats who work in the federal government.

Spring 2015: To Whom Does the U.S. Government Owe Money?

Tuesday May 19th, 2015   •   Posted by Craig Eyermann at 6:29am PDT   •  

On Friday, 15 May 2015, the U.S. Treasury identified the national origins of the major foreign holders of debt issued by the U.S. government through the end of March 2015, the halfway point of the federal government’s fiscal year. With that information, we can now update our chart showing just who has loaned the U.S. government money in the Spring of 2015:


The big news is that debt held by “Mainland China” has once again edged out the total U.S. government-issued debt holdings of Japan to reclaim its undisputed spot as the biggest foreign owner of the U.S. national debt. That China is the largest foreign holder of that debt was never really in dispute, however, because the figure for Mainland China omits the amount of U.S. debt held by Hong Kong, which has been under Chinese rule since 1997.

Collectively, foreign entities hold about 47 percent of all the U.S. government’s “Debt Held by the Public”, which totaled $13.099 trillion on 30 March 2015.

Domestically, the big story about the U.S. national debt is that it has been essentially frozen at $18.152 trillion since 13 March 2015, which is when the total public debt outstanding of the U.S. government hit its statutory debt ceiling. Since that time, the U.S. Treasury has been playing something of a shell game to hold the U.S. national debt at that level, replacing the holdings of debt held by entities it controls with I.O.U.s as it continues issuing new debt to other holders.

In our chart above, that shell game shows up as a decrease in the amount of debt that appears to be held by the U.S. Civil Service Retirement and Disability Fund, which appears to have fallen from $857.2 billion, the amount it was reported as holding at the end of the U.S. government’s 2014 fiscal year, to $818.2 billion just six months later. What that change means is that in just the first 14 days after the U.S. national debt hit its statutory ceiling, the U.S. Treasury exchanged at least $39 billion of short-term debt that came due in the holdings within the U.S. Civil Service Retirement Trust Fund with I.O.U.s so it could continue issuing new public debt to other parties.

That situation will change suddenly and dramatically when the U.S. Congress acts to increase the nation’s statutory debt ceiling, which will likely happen as it progresses toward passing a budget for the first time since 2009. When that happens, the U.S. Treasury will rush to exchange the I.O.U.s that it has issued into the accounts it controls with newly issued U.S. government debt securities. When that happens, it will be as if the U.S. national debt had never been frozen at 18.2 trillion dollars.

Data Sources

Federal Reserve Statistical Release. H.4.1. Factors Affecting Reserve Balances. Release Date: 2 April 2015. [Online Document]. Accessed 15 May 2015.

U.S. Treasury. Major Foreign Holders of Treasury Securities. Accessed 15 May 2015.

U.S. Treasury. Monthly Treasury Statement of Receipts and Outlays of the United States Government for Fiscal Year 2015 Through March 30, 2015. [PDF Document].

Cross posted at Political Calculations.

Bay Bridge Not Over Water, Corrosion Troubles

Monday May 18th, 2015   •   Posted by K. Lloyd Billingsley at 6:18am PDT   •  

NewBayBridge_200As we have noted many times, the new eastern span of the San Francisco Bay Bridge was 10 years in the making and a whopping $5 billion over budget, but all that time and money could not guarantee safety for the public. Before he moved to Congress in recent elections, state senator Mark DeSaulnier held hearings in which Caltrans whistleblowers called for a criminal investigation. None took place, but the safety issues persisted, with cracked welds and problems with bolts and rods. And now as CBS reports, one of the Bay Bridge’s anchor rods failed a major test. The rod “moved easily when tugged on, which may mean it corroded from exposure to water and fractured. Significant levels of corrosive chloride were found in some sleeves that hold 25-foot long steel rods at the base of the tower.” As many as 100 rod sleeves were affected, according to the CBS report.

The Toll Bridge Program Oversight Committee approved $4 million to study the problem. According to Committee chairman Steve Heminger, if it were an “ongoing intrusion,” this would be a serious problem “and would require an investigation of the foundation itself.” In 2013, 32 rods failed and that required an investigation costing $45 million. None of this was supposed to happen, and as Mark DeSaulnier has lamented, “it’s frustrating that there’s never been anyone in the management of the bridge who has been held accountable.” Key Caltrans boss Tony Anziano conveniently retired.

According to state transportation officials, the bridge remains safe, but around the Bay Area some aren’t so sure. As we noted, UC Berkley structural engineering professor Abolhassan Astaneh-Asi declines to use the bridge. Meanwhile, demolition of the old span continues, and companies such as Google, who seek to use private ferries for their employees, must contend with the Water Emergency Transportation Authority. During a five-day trial, the WETA has ruled that Google workers will not park in the Harbor Bay Ferry lot.

Big Brother Barges Into the Bathroom

Wednesday May 13th, 2015   •   Posted by K. Lloyd Billingsley at 10:49am PDT   •  

ccarb_logo_200When it comes to intrusive government, California is plunging to new depths, as Daniel Weintraub notes in the Sacramento Bee. “For Californians who fear big government, this might sound like the ultimate nightmare: An unelected board and its vast scientific bureaucracy is going to force us to pay more to wipe our butts.”

The “unelected board” is the California Air Resources Board (CARB) armed with the Global Warming Solutions Act of 2006, which as Weintraub charitably puts it, “put a price on carbon dioxide and other greenhouse gas emissions” to encourage industry and consumers “to use products that can be made with less harm to the environment.” Headed by unelected regulatory zealot Mary Nichols, CARB deploys onerous regulations that drive up the price of gasoline, a burden on the working poor and middle class. More recently, as Weintraub explains, “has studied the numbers on toilet paper’s contribution to climate change” and decided that the plant of Kimberly-Clark creates the fewest greenhouse gasses. Proctor & Gamble, the only other company that makes toilet paper in California, claimed that its product was better, so CARB attempted to recalculate its benchmark for “water absorbency.” But Kimberly-Clark cried foul and is trying to overturn the ruling.

Weintraub laments that simpler approaches such as a carbon tax or permit sale were not politically feasible. “So this is where we are today, with state officials sticking their noses in our bathrooms, studying the relative fluff and absorbency of toilet paper and assessing the damage each kind of tissue does to the environment.” This axis of bad legislation, unelected bureaucrats, and regulatory zealotry, as Weintraub says, will force us to pay more to wipe our butts.

Tax Rules Too Complicated for IRS to Explain

Wednesday May 13th, 2015   •   Posted by Craig Eyermann at 7:19am PDT   •  

IRS-building-sign_200x200It is something of an understatement to say that the U.S. tax code is both very big and very complex, but did you know that the U.S. Internal Revenue Service believes that to be so true that it actually prohibits its employees from providing guidance on tax code matters via social media, the preferred modern communication method of millions of Americans?

Zach Noble of FCW tells the story of the apparent Disappearance of TaxmanKeith:

He was something of a legend on r/personalfinance and other financial communities on the social network Reddit, posting IRS forms and basic guidance in response to thousands upon thousands of taxpayer questions.

But a month ago, TaxmanKeith went silent, and recently he vanished altogether.

Are IRS rules to blame?

It’s ironic, but IRS social media guidelines essentially instruct most employees not to offer anyone guidance on the complex tax code – precisely because the tax code is too complex for an IRS employee to be sure they’re giving out good information.

Noble goes on to describe TaxmanKeith as someone who would be something of an anomaly at the IRS, someone who cares enough about helping regular Americans with their taxes that he did so on his own time, primarily through the social media site Reddit.

Noble describes the IRS’s official level of social media engagement with regular Americans:

By the end of the 2015 tax season, the agency was answering only 40 percent of taxpayer phone calls, and while the IRS has a slew of official social media accounts, those tend to have small audiences and direct engagement with taxpayers is non-existent.

The most recent IRS videos on YouTube average a lackluster 20-odd views per day, and many of the posts on the agency’s Tumblr page have zero “likes.”

On Twitter, the IRS has more than 65,000 followers, but the account does not respond to taxpayer tweets because “The IRS uses social media to share public information, not to answer personal tax or account questions.”

For most individual IRS employees, offering anything resembling tax advice on social media is strictly verboten, IRS spokesmen told FCW.

In fact, Noble quotes an IRS spokesman as saying:

“The tax code is enormously complex. No one person [at the IRS] knows all of it.”

Nor does the IRS seem eager to help regular Americans understand it.

IRS Marijuana Rip-Off

Monday May 11th, 2015   •   Posted by K. Lloyd Billingsley at 11:30am PDT   •  

irs_200Any effort to track government waste, fraud and abuse is bound to take ample notice of the federal Internal Revenue Service. As we have noted, the IRS targeted non-profit groups favoring smaller government and lower taxes. Then IRS bosses tried to pass this off as “horrible customer service,” even as they doled out huge bonuses and paid people for doing essentially nothing. We also noted that the IRS does a poor job of fighting actual tax fraud, costing taxpayers billions. But with this outfit there’s always more.

As Jack Healy observes in the New York Times, the IRS is now punishing legal growers of marijuana by denying them the tax deductions used by other legal businesses. They do this under a 1982 law aimed at illegal trafficking in drugs, but they apply that measure in Colorado and other states where the cultivation of marijuana is legal.

As Healy notes, the IRS prevents growers “from deducting their rent, employee salaries or utility bills, forcing them to pay taxes on a far larger amount of income than non-marijuana businesses with the same earnings and costs.” Healy cites the case of Bruce Nassau, operator of five Colorado marijuana shops, who wound up writing a check for the taxman that amounted $275,000. John Davis, owner of a medical marijuana dispensary in Seattle, earned $53,369 in profits and wound up owing $46,340 in taxes.

Rachel Gillette, a lawyer who represents the National Organization for the Reform of Marijuana Laws, told Healy, “We’re talking about legal businesses, licensed businesses. There’s no reason that they should be taxed out of existence by the federal government.” Rep. Earl Blumenthal, an Oregon Democrat, told the Times that the IRS actions are crippling thousands of businesses by doubling, tripling and quadrupling their taxes. Blumenthal and Sen. Ron Wyden have introduced legislation to allow business that follow state laws to take regular deductions. That legislation will bear watching, but in the meantime the IRS is effectively punishing people for following the law. That is both wrong and counterproductive. Crippled businesses won’t be hiring new workers and contributing millions of dollars to state budgets.

Social Security Going Broke Faster

Sunday May 10th, 2015   •   Posted by Craig Eyermann at 6:33am PDT   •  

SocialSecurity Big news regarding the true state of Social Security’s finances from CNBC:

New studies from Harvard and Dartmouth researchers find that the SSA’s actuarial forecasts have been consistently overstating the financial health of the program’s trust funds since 2000.


Researchers examined forecasts published in the annual trustees’ reports from 1978, when the reports began to consistently disclose projected financial indicators, until 2013. Then, they compared the forecasts the agency made on such variables as mortality and labor force participation rates to the actual observed data. Forecasts from trustees reports from 1978 to 2000 were roughly unbiased, researchers found. In that time, the administration made overestimates and underestimates, but the forecast errors appeared to be random in their direction.

“After 2000, forecast errors became increasingly biased, and in the same direction. Trustees Reports after 2000 all overestimated the assets in the program and overestimated solvency of the Trust Funds,” wrote the researchers, who include Dartmouth professor Samir Soneji and Harvard doctoral candidate Konstantin Kashin.

The Social Security and Medicare Trustee’s actuarial forecast from 2014 indicates that the Old Age and Survivors’ Insurance Trust Fund, which is more popularly known as the Social Security Trust Fund, was on track to run out of funds in 2033. In fact, if you sign up to get your personal Social Security statement from the “My Social Security” government website, your statement will indicate that beginning in 2033, the amount of your monthly benefits that will be paid out through the rest of your life will be reduced to 77 percent of the value indicated.

That’s something that will be a very big deal to every American who can reasonably expect to live past 2033, as many would perhaps find it difficult to have that portion of the income they are counting upon to sustain them in their retirement slashed by nearly 25 percent. Or actually now 2031, since the Harvard and Dartmouth researchers estimate the Social Security Trust Fund will more likely run out of money and move up the day of monthly benefit payment cuts some two years earlier than Social Security’s actuaries have forecast.

As for what accounts for the discrepancy between their projections and those provided by Social Security’s Trustees, the researchers indicate that they believe the life expectancy estimates that the program’s actuaries are using to make their projections aren’t keeping up with how fact the actual life expectancy of Americans is increasing.

Only in a bureaucracy can having more people live longer than what the bureaucrats expect be a bad thing.

Unexpected Perks of Being a Government Bureaucrat

Friday May 8th, 2015   •   Posted by Craig Eyermann at 7:31am PDT   •  

2836429_S Every year, thousands of regular Americans are prosecuted by government prosecutors for the kinds of activities that, for government bureaucrats, would seem to be considered to be perks of being on the federal government’s payroll.

For example, in 2012, the most recent year for which the FBI provides arrest statistics, there were 7,900 arrests on charges related to gambling and another 56,600 arrests on charges related to prostitution and commercialized vice. According to the Department of Defense’s Office of Inspector General, a number of military and civilian employees of the Department of Defense are using their government-issued credit cards to gamble and to pay for “adult entertainment,” including “escort services.” The government plans to deal with the misconduct of its employees by issuing “stern new warnings.”

Meanwhile, the Internal Revenue Service’s Criminal Investigation unit has revealed that it initiated 4,297 cases against regular Americans it accuses of tax evasion and fraud in 2014, for which it boasts of having the highest conviction rate in all of federal law enforcement, with 93.4 percent of all filed cases resulting in convictions, with penalties on the convicted ranging from fines to imprisonment. According to the Department of the Treasury’s Inspector General, over the 10-year period from October 2003 through September 2013, no fewer than 960 of the 1,580 IRS employees who were determined to have willfully violated U.S. tax laws were allowed to stay on the federal government payroll, receiving “counseling, reprimands or suspensions” instead of being sacked from their jobs as required by a 1998 law.

In 2014, the Equal Employment Opportunity Commission processed 88,778 charges of workplace discrimination against American businesses, which resulted in $296.1 million in fines and legal settlements for the victims of such misconduct. By contrast, the staffers of the Environmental Protection Administration, who have a long history of alleged serious workplace discrimination continued to evade accountability for this kind of misconduct, as the EPA’s managers and senior leadership failed to act to fire employees who have engaged in workplace discrimination, where incidents include long-standing episodes of sexual harassment of interns and also employees who watch pornography on government computers for up to six hours a day on the job. The EPA’s management also has a history of concealing evidence of misconduct and illegally retaliating against whistleblowers who expose its employees’ misconduct.

It would seem that federal officials show quite a lot of prosecutorial discretion when federal employees are the ones accused of misconduct. And we haven’t even mentioned the newest in a series of scandals at the Department of Veterans Affairs in this latest episode of our ongoing series, Bureaucrats Behaving Badly.

The Fix Is In for Broken Government

Wednesday May 6th, 2015   •   Posted by K. Lloyd Billingsley at 5:02am PDT   •  

FixCAChallenge_Logo_200“They can’t complete a project, like building a bridge or updating a computer system, without it being late, over budget, or even obsolete by the time of completion.” That’s venture capitalist Tim Draper on California government, and he’s right. As we have observed, the new eastern span of the Bay Bridge was 10 years late, $5 billion over budget, and serious questions remain about its safety. The state’s bullet train project is supposed to cost $68 billion, will likely be slower and more expensive than air travel, and doesn’t take people where they need to go. These boondoggles are not the only evidence that government violates the maxim: if it ain’t broke, don’t break it.

Mr. Draper has launched Innovate Your State, a nonprofit (501c3) organization dedicated to educating and encouraging public participation to fundamentally improve government. The first project is the Fix California Challenge, which will field and evaluate ideas in government spending, waste, debt, pensions, taxes, health care, water policy, and education, one of the more serious concerns. Government’s idea for education is to transfer taxpayer dollars to a bureaucracy and keep the dollars coming despite meager results. Currently, approximately 74 percent of California’s college freshmen need remedial math and English, and these are supposedly the best students. True to form, the state has just named part of the education code after the late John Mockler, a lobbyist who enriched himself by working both sides of the table. Taxpayers and think tanks alike would do well to promote educational choice for all, as a matter of basic civil rights.

Government’s idea for health care is Covered California, the wholly owned subsidiary of Obamacare, which turns out to be a misery index. Taxpayers and think tanks should advance ideas that give choice to patients and promote innovation. Bureaucracies don’t innovate. Current government ideas have worsened California’s ongoing drought. Taxpayers and think tanks should pursue water exchanges, an innovative idea already working in Australia.

As the San Jose Mercury News noted, there is “no shortage of ideas for fixing government. may be something to watch.” Taxpayers and think tanks should keep the ideas coming. And with so many corrupt politicians going to jail, Mr. Draper might expand the categories to include criminal justice. Jon Coupal of the Howard Jarvis Taxpayers Association suggests limiting politicians to two terms, one in office and one in prison. As he observes, “Illinois already does this, and it seems to be working.”

The Government versus Infrastructure

Tuesday May 5th, 2015   •   Posted by Craig Eyermann at 6:55am PDT   •  

FHWA_Hec1 We’ve answered another question at Quora, this time related to the perception of why there haven’t been any recent large-scale innovative infrastructure or civil projects in the United States. As you’ll see in our response, there actually have been, but there’s also a very good explanation for why we don’t have a better civil infrastructure.

In a nutshell, the answer to the question of why there haven’t been any large scale civil infrastructure projects is that the nature of large scale civil infrastructure projects has changed.

Here, instead of launching something on the scale of an interstate highway system to connect major cities, a lot of focus has been placed upon connecting smaller cities to that system and to expand the local highway networks surrounding the major cities themselves and also their airports. That activity has continued into the present day, as there have also been a number of highly visible civil engineering projects completed in very recent years, the most successful of which is perhaps the Hoover Dam bypass between Arizona and Nevada over the Colorado River gorge.

Hoover Dam Bridge Top 10 Engineering Facts

We would also consider the development of the Internet and mobile phone networks as great examples of modern infrastructure development, but many don’t put them in the same class as the very visible concrete and steel construction efforts that most automatically think of when they think of civil infrastructure.

But to get to the real meat of the question, the answer is that a lot of these “concrete and steel” projects have been considerably less successful, to the point where they became such money pits that they actually prevent other, better projects from going forward because the money isn’t there to build them. California’s Bay Bridge is generally recognized as both a major waste and potential engineering catastrophe in waiting.

Bay Bridge Crack-up Continues

Do Big Infrastructure Projects Boost GDP?

The same is true for Boston’s “Big Dig” project, the cost of which is still adding up.

The Boston Big Dig and the Problems with Complex Projects

Other massive multi-billion dollar projects have to be considered to be abject failures, most notably, Seattle’s Alaskan Way Viaduct tunnel replacement project.

Government Tunnel Vision Shafts Taxpayers

Not only was that particular project not wanted by the people it is intended to serve, all work on it has actually stalled out because the massive tunnel boring machine that was specifically built for the task has broken and nobody can figure out why. It’s been stuck underground for several years now.

Seattle’s unbelievable transportation megaproject fustercluck

Meanwhile, a lot of transportation funding is being diverted to similar pet projects of politicians, namely high speed rail and light rail projects, at the expense of effective public transportation systems.

Roads or Light Rail?

How Ruling Class Railroads Taxpayers

What If We Bought Cars for the Poor Instead of Light Rail Systems?

So the bottom line answer to the original question is that we are still doing innovative civil infrastructure projects, but not as much as we could be because politicians are making far too many wasteful decisions.

Note: We edited our original reply above to relocate the “Roads or Light Rail” link to be grouped with similar links related to railroads and light rail projects.

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