The Treasury could print money to pay its bills, and the Fed could soak up the excess liquidity by selling its Treasury holdings, according to some economists.
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.
When the government writes a check, it goes to whoever 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.
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Source: John Carney | The Atlantic