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U.S. Treasury has more money than you think

A simple accounting change could give Uncle Sam more than US$350 billion extra to play with if a debt ceiling deal is not struck.

U.S. Treasury Secretary Timothy Geithner (Photo: Saul Loeb/Getty)

After pinching pennies to avoid a U.S. default on debts in July, U.S. Treasury Secretary Tim Geithner now insists Uncle Sam will have to break its obligations to creditors in August unless the federal government’s debt ceiling is raised.

The U.S. can borrow until Aug. 2 after reaching the US$14.29-trillion limit because of “stronger-than-expected tax receipts” and “extraordinary measures” such as suspending the sale of bonds for state infrastructure projects, Geithner said in a letter to congressional leaders. See Bloomberg story here.

But that may not be a hard deadline, says Bob Eisenbeis, chief monetary economist with Florida-based Cumberland Advisors. In fact, it is likely just a scary story that a frustrated Geithner wants the folks in Congress to believe in order to get them to negotiate a deal that will allow America to keep running up its credit card.

According to Eisenbeis, Treasury officials have more than one creative option that would allow them to avoid missing payments to the nation’s creditors in August. In a Cumberland commentary on the topic, the economist notes America could simply sell some gold to avoid an immediate default.

Another golden option wouldn’t even require the sale of any yellow metal. After all, the U.S. Federal Reserve central bank values its gold certificates with an out-dated price of US$42 per ounce. If these holdings were simply marked to the current market price of about US$1,487 per ounce, the Fed’s gold certificates would be revalued at US$389 billion more.

And as Eisenbeis notes, Section 7 of the Gold Reserve Act of 1934 says any capital gain from a revaluation of the Federal Reserve’s gold certificates goes into the Treasury, not the Fed’s bank account. The Treasury’s account at the Fed, and recorded government revenues, would increase by more than US$350 billion. “This would bring the Treasury’s deposits at the Fed to nearly half a trillion dollars or more. These are funds that the Treasury could then use to settle debts.”

This would not increase the federal debt, nor would it require the actual sale of gold. It simply requires Congress to sign off on an accounting gimmick.