Treasury time bomb has yet to be disarmed

Staying Ahead

November 27, 1995|By JANE BRYANT

NEW YORK -- Political terrorists last week planted a time bomb in the U.S. Treasury. Its hissing fuse is laying waste to the normal way that the federal government pays its bills.

But what happened may sound like routine partisan grandstanding. Congress refused to increase the federal debt ceiling unless President Clinton acceded to certain budgetary demands.

He didn't, and that's forcing the government to scramble for money. U.S. finances are now in uncharted territory.

If this time bomb explodes, it will drive up interest rates on Treasury securities as well as the cost of your adjustable-rate mortgage, home-equity loan and variable-rate credit card. Bond mutual funds could plunge in value, as would stocks.

Here are the answers to some of your questions about what's going on in the federal playpen:

* Hasn't this problem been solved, now that the government is back to work? No way. The return of government workers has not ended the battle over the limit on the federal debt.

* What's the national debt limit? The current unimaginable number is $4.9 trillion. Each year's budget deficit increases the embedded debt. It's as if you kept adding purchases to your revolving credit account, without ever paying anything back. Periodically, Congress raises the debt limit, to accommodate the additional money it has spent.

* Why not freeze the debt limit? Won't that put a lid on government spending? Alas no. It won't save the government a nickel because the debt has nothing to do with new government spending.

To curb new spending, you have to restrain each year's federal budget. The debt, by contrast, finances spending that the government previously OK'd -- things like highway construction, defense contracts, Social Security payments and the salaries of federal judges. Using the credit-card analogy: You bought that stuff, now you have to pay for it. If you don't, you've stiffed your creditors and will get a black mark on your credit report.

America's major creditors are people and institutions who hold Treasury securities. Those are the government's IOUs. You may hold Treasuries yourself, either directly or in a mutual fund. Your investments will lose value if the interest isn't paid on time.

* Why not default on the interest payments, so everyone can see that this Congress is serious? Everyone knows that the U.S. government would eventually pay. But the intervening turmoil would be unimaginable, for investors, for business, for jobs, for international relations and for the financial health of the economy itself. As your mother used to tell you on the Fourth of July, kids who light firecrackers sometimes blow their hands off.

* With the debt ceiling frozen, where is the government getting the money to pay its bills? Treasury Secretary Robert E. Rubin is juggling the federal books. He took two civil service retirement funds and cashed out $61.3 billion that was invested in Treasury securities. That lets him borrow $61.3 billion on the public market and still stay below today's debt ceiling. Those borrowings should carry the government through late December -- ensuring that Social Security checks will be paid on Dec. 1.

When the crisis is over, and the debt ceiling up, Rubin will restore the $61.3 billion in Treasury securities to the retirement funds, plus all the interest that was lost. Federal employees won't lose a dime.

* Could Rubin dip into other government trust funds, like Social Security? Legally, he probably could. But the president has vowed to leave that fund untouched. Social Security funds were used, briefly, during a similar debt battle in 1985 -- and the public howled. As a result, Congress passed a law in 1986, designating the civil service funds as the place to turn first for emergency debt management. The current Congress tried to revoke this flexibility, which would have made it harder to avoid default. Clinton rightly vetoed it.

* How long can Rubin juggle the debt? In theory, for quite a while -- maybe even through the next election. But to use more of the trust funds, he has to satisfy various legal technicalities, which may get harder to defend. Meanwhile, credit-rating agencies at home and abroad are warning that the safety rating for Treasury securities may be downgraded, which would raise the interest that the government has to pay. It may feel good to thumb your nose at your creditors, but they'll get you in the end.

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