It may have been the least shocking announcement of the year, but Treasury recently disclosed that it expects us to hit the debt limit on December 31, 2012. Just a few weeks ago, in my article 'Increase Debt Limit or Tax Refunds Will Not Go Out', I boldly projected that the debt limit would not become a constraint until early to mid-February. So of course I promptly received a few emails asking how I missed it so badly.
For now, I'm standing by my projection, but this gives me a great opportunity to explain exactly what is going on and why hitting the debt limit next Monday is just a little arm twisting by Geithner and Obama in response to Republican threats over the weekend.
First and foremost, let's just get it out there. Hitting the debt limit this early is a purely voluntary event. Per the December 24, 2012 Daily Treasury Statement, the U.S. cash balance was $64B, and debt outstanding was $95B under the statutory limit, giving us a "debt limit cushion" of $159B. Using last year as a guide, this cushion should get us well past next Monday and all the way into the first week of February. Now think for a second about the accounting behind debt issuance. We could hit the debt limit tomorrow by simply issuing $95B of debt. Debt would increase up to the limit of $16.394T and cash in hand would increase $95B to $159B, leaving our debt limit cushion unchanged. Geithner could have made this very move months ago, yesterday, or a month from now, but he has decided instead to do it December 31, 2012. I suspect this is a rather blatant attempt to link the fiscal cliff and debt limit together at the hip, a direct response to blunt Republican threats to use the debt limit for leverage down the road.
I don't know who will get the best of this political tussle, but the drama does not change the math. The true day of reckoning isn't when Geithner chooses to hit the limit, it's when we hit the limit and run out of cash. A few weeks ago I projected this to be around the 15th of February when tax refunds will be in full swing and a ~$35B interest payment is due. With a few more weeks of data points, I would tweak it and add maybe a week to that on strong December revenues, with one potential variable I haven't figured out how to model yet.
It is now being reported that without an AMT fix by next Monday, millions of refunds could be delayed. Depending on the length of the delay and number of filers affected, this could push back the date weeks or even months, which might just be the point.