Can the Treasury Department really run out of money?

The White House insists the U.S. government will not be able to stay current on all of its obligations as of Aug. 2 unless the debt ceiling is raised.

But can the government of the United States ever really run out of money?

The question is a bit more complex than it might seem. In some ways the government really is like every ordinary American family. It has a bank account. Every day the funds in that account grow by the amount of deposits that are made and shrink by the amount of withdrawals.

At the start of the day last Friday, the bank account of the United States government at the Federal Reserve Bank of New York had $83 billion in it. That day the bank received $7 billion in deposits, and saw around $13 billion in withdrawals. So by the end of the day we were down around $6 billion, to $77 billion.

Deposits come from tax receipts, air transport security fees, the postal service, Medicare premiums, and earnings from the Federal Reserve itself. Withdrawals go to pay for everything the government does: federal employee salaries, income tax refunds, NASA, interest on our debt, unemployment insurance benefits and paying defense contracts.

A big source of deposits for the government is usually the government selling bonds. And that’s where the debt ceiling comes in: if the government cannot sell any more bonds because it’s hit the debt ceiling, it won’t have the funds to pay for all those things it makes withdrawals for. That includes social security checks and interest payments on the debt.

So what happens next?

When the government writes a check, it goes to whomever is getting paid. The payee then deposits it in its own bank account. The bank then submits it to the Federal Reserve for clearing.

So far, that’s just pretty much the same thing that happens when anyone else writes a check. Except for something very strange—the Obama administration seems to be insisting the Federal Reserve would not allow the U.S. Treasury Department to overdraw its account.

Millions of Americans have overdraft protection on checking accounts that allow them to write checks in excess of the amounts deposited in the accounts. These are sometimes controversial because banks often attach high fees to overdrafts, which mean that you could put a $3 cup of coffee on your debit card and get hit with a $35 fee. But those kind of fees are generally waived for very wealthy bank customers who, ironically, enjoy feeless overdrafts.

When I was a lawyer I was never terribly wealthy. But I did enough business with my bank that it gave me a free overdraft. If I could have that kind of protection as a young associate in my 20s, shouldn’t Treasury Secretary Tim Geithner be able to get the same deal from the Federal Reserve bank he used to run?

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