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Now It's Debt, Now It Isn't

The opinions expressed by columnists are their own and do not necessarily represent the views of

On Feb. 12, 2010, President Barack Obama signed a law increasing the legal limit on the national debt from $12.394 trillion to $14.294 trillion.

That gave the U.S. Treasury the legal authority to go out and borrow an additional $1.9 trillion -- about another $16,165 per American household.

By the close of business on Monday, the Treasury had almost finished borrowing all that. The portion of the national debt subject to $14.294 trillion limit stood at $14.246886 -- leaving the Treasury another $47.114 billion in borrowing authority before hitting the legal limit.

In a letter to Senate Majority Leader Harry Reid last month, Treasury Secretary Timothy Geithner said: "The Treasury Department now projects that the debt limit will be reached no later than May 16, 2011."

But Geithner also said in that letter there were "extraordinary measures" he could take to push back the day of reckoning.

One of these is particularly symbolic of the way the federal government handles taxpayers' money.

One thing he could do, Geithner told Reid in an appendix to his letter, was determine "that a 'debt issuance suspension period' exists, which would permit the redemption of existing, and the suspension of new, investments in the Civil Service Retirement and Disability Fund (CSRDF)."

Geithner spelled out what this means in the obscure lexicon of Treasury wonks.

"The CSRDF provides defined benefits to retired and disabled Federal employees covered by the Civil Service Retirement System," wrote Geithner. "The fund is invested in special-issue Treasury securities, which count against the debt limit. Congress has given Treasury statutory authority to take certain actions in the event of a debt limit impasse. Specifically, the statute authorizes the Secretary of the Treasury to determine that a 'debt issuance suspension period' exists and, once he has done so, Treasury can (1) redeem certain existing investments in the CSRDF, and (2) suspend new investment."

In plain English, this means Treasury can temporarily stop counting the debt it is accruing by spending money that belongs to the Civil Service Retirement and Disability Fund, and it can take debt it has already piled up from that fund and temporarily pretend it is not debt.

What ordinarily happens is this: Federal workers in the Civil Service Retirement System pay money to the Treasury that the Treasury turns around and disburses to help pay the general expenses of the government. In return, Treasury gives the CSRDR "intra-governmental" bonds in the amount it spent. These intra-governmental bonds count as part of the national debt subject to the $14.294 trillion limit.

On the other hand, when the government pays monthly benefits to retired federal workers, it "redeems" intra-government bonds it has given to the CSRDF, thus reducing the national debt by the value of the bonds.

Currently, according to the Congressional Research Service, Treasury takes in about $2 billion every month from federal workers paying into the CSRDF and pays out about $5.7 billion. That mean the Treasury can reduce the national debt by a net $3.7 billion per month as a result CSRDF.

However, the $3.7 billion in CSRDF benefits that the Treasury pays out over and above the $2 billion in CSRDF revenue has to come from somewhere -- which means it comes from taxes or new borrowing.

So, how can the Treasury secretary ease a debt-limit crisis now by changing the way the Treasury deals with the CSRDF?

First, as Geithner said, he can "suspend new investment" of CSRDF's money. That means that after Geithner declares a "debt issuance suspension period," the $2 billion in revenue coming in each month to the CSRDF no longer has to be "invested" in government debt. The Treasury still gets the revenue but simply stops booking debt sales to the CSRDF in return.

Secondly, as Geithner said, he can "redeem certain existing investments in the CSRDF." That means he can take off Treasury's books more debt than just the $5.7 billion needed in a given month to pay benefits for the retired federal workers who paid into the system. If he declares a debt limit suspension period of 10 months, for example, he can prematurely "redeem" bonds equal to 10 months of benefit payments -- or about $57 billion.

"Assuming a two-month debt issuance suspension period, this measure would free up approximately $12 billion in headroom," Geithner said in his letter to Reid.

Once this $12 billion -- or whatever amount Geithner settles on -- is deemed as "redeemed" debt rather than real debt, the Treasury can go out into the market and borrow that much money from real lenders.

If the debt subject to the legal limit is bumping the $14.294 period and Geithner declares a two-month suspension period, the $12 billion in CSRDF debt taken off Treasury's books would drop the debt back down to $14.282 billion and allow Geithner to borrow another $12 billion in the public market -- from the Chinese or Japanese, or whoever is left who wants to loan the U.S. government money.

When the Congress and the president enact a new law lifting the legal debt limit again, the Treasury secretary is required under existing law to retroactively restore the CSRDF to where it would have been had there never been a "debt issuance suspension period."

In the government's view, the bottom line is this: Money it has spent from the civil servants' trust fund is debt when the government says it is debt and it is not debt when the government says it is not.

In the real world, the bottom line is this: Our federal government is fast approaching the point where the market will not trust it with its money.

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