Speaking at his third news conference in two weeks on the stalled talks over raising the debt ceiling, President Barack Obama urged Congress on Friday to "do something big" for the economy to avert the unthinkable: a U.S. default.
Behind his words was the acknowledgment that without more borrowing authority, government spending cuts will begin to hit hard and fast in early August and ripple through the economy.
Though no one can predict exactly how it might play out, the resulting cash squeeze would wreak havoc on an already fragile economy, say analysts and economists.
For the moment, there appears to be little threat of a default on government debt; there is more than enough cash coming in to make the nation's interest payments.
The greater worry is that by robbing Peter's coffers to pay the interest on Paul's debt , the government will have to make tough choices about which federal programs won't get paid, and that could throw people out of work and send the economy back into recession.
Without the authority to borrow more money, the Treasury will come up short by about $134 billion in August. That spending shortfall would amount to more than 10 percent of gross domestic product for the month.
"If there's no deal by early August," Capital Economics economists wrote in a recent research note, "the drop in other spending would, if it lasted more than a few days, drive the economy into recession."
After scrambling for two months to buy more time, the government is rapidly running out of options.
When the debt ceiling was reached on May 16, the Treasury undertook what it called "extraordinary measures" to borrow from various accounts. That freed up about $232 billion to tide it through the next few months while Congress and the White House worked out a budget plan.
That cash cushion has been melting away; it rose briefly in June as tax payments and other receipts exceeded outlays. But it's on a downward track toward zero sometime in early August. The Treasury projects that it will be flat broke on August 2, with no way to raise enough cash to cover all the bills.
On or about that date, government officials have to begin making hard choices. For August, the Treasury projects it will take in roughly $172.4 billion to cover $306.7 billion worth of spending that, by law, it has to pay. To demonstrate what those choices might look like, Jerome Powell and his colleagues at the Bipartisan Policy Center took a look at how far the money would go.
They started with the widely held assumption that interest on the debt ($29 billion for August alone) would be paid first, thus avoiding the disastrous impact of a default.
The rest of the incoming cash would cover a month's worth of Social Security ($49.2 billion), Medicare and Medicaid ($50 billion), veterans affairs programs ($2.9 billion), education and tuition programs ($14 billion), housing assistance for the poor ($6.7 billion), food stamps ($9.3 billion), and unemployment insurance ($12.8 billion).
That's where the cash runs out and the list of unfunded programs begin. There would be no money left for defense contracts ($31.7 billion) or military active duty pay ($2.9 billion).
The Department of Justice ($1.4 billion) would close, shutting down the federal court system and halting operations at the Federal Bureau of Investigation. So would the Department of Energy ($3.5 billion), including national nuclear energy programs.
The Transportation Department ($1.3 billion) would cease functioning, including the Federal Aviation Administration and air traffic control system. So would the Centers for Disease Control ($0.5 billion).
And there would be no money to cover tax refunds ($3.9 billion) from the IRS. Even if there were, there would be no federal workers ($14.2 billion in salaries and benefits) to mail the checks.
"You can move the chess pieces around, but you can't win," said Powell, a former Treasury undersecretary in the George H.W. Bush administration. "There is no way to do this without creating a massive public uproar. There just isn't."
The impending cash crunch has been compared to the government shutdown in late 1995, when federal workers were briefly furloughed after Congress and the Clinton White House couldn't agree on a budget. Most government spending, however, continued at levels authorized under the previous budget.
In this case, though Congress has legally obligated the Treasury to pay for government programs and services, it has cut off the cash needed to do so.
"That's put the executive branch in the situation of trying to decide which spending laws not to obey," said Powell. "There is no precedent. There is no rule book."
With no rule book to follow, it's unclear just how the Treasury would decide which bills to pay. Treasury lawyers face a legal minefield sorting through specific contractual obligations spelled out in thousands of laws authorizing individual government programs.
Some analysts suggest it might have to operate day to day, spending only as much as it receives on a given day. That could make for even tougher choices. Unlike a household juggling its finances with fixed weekly paycheck, the flow of money in and out of the Treasury is subject to wide swings.
On Wednesday August 3, the day the government is expected to run out of cash, the Treasury expects to take in $12 billion in revenues, according to Powell's analysis. But it also has to cover $32 billion worth of bills coming due that day, including $23 billion in Social Security payments. With only enough cash to cover about half those checks, there is no legal framework for deciding which retirees get paid and which don't.
The next day, Treasury expects to collect just $4 billion to cover another $10 billion in bills. On August 5, there's only $7 billion coming in to cover $12 billion in scheduled payments. By the end of the first week of the government's cash squeeze, roughly $7.5 billion in Medicare and Medicaid bills would have gone unpaid, along with $4.8 billion worth of defense costs.
Some opponents of raising the debt ceiling suggest that it will force the government to make spending cuts that Congress and the White House have been unable to make. Simply starving the Treasury of cash, however, won't accomplish that goal, according to former Congressional Budget Office Director Douglas Holtz-Eakin
"Once you pass laws that say spend the money, you have an obligation to spend the money," he said. "When the revenue comes in, the spending still happens. So not raising the debt ceiling actually doesn't cut spending."