Treasury Secretary Timothy Geither with President Obama

The Treasury has begun its “extraordinary measures”to fend off the reaching of the nation’s debt limit. The US stands just $67 billion below the debt limit as of Friday, and without the measures would reach the debt limit before the end of the month.

The play book includes:

–Suspending sales of State and Local Government Series Treasury securities–special-purpose Treasurys known as Slugs that state and local governments use to comply with tax rules. The move doesn’t increase headroom under the ceiling, but it stops Treasury from piling on new public debt.

–Redemption of existing and suspension of new investments in the Civil Service Retirement and Disability Fund after determining that a “debt issuance suspension period” exists. The action allows the government to redeem Treasurys held by the fund–last time around that worked out to about $12 billion over two months. By law, the fund must be made whole once the debt limit is increased.

–Suspending reinvestment in the Government Securities Investment Fund, or G Fund, a money-market defined-contribution retirement fund for federal employees. Federal employees wouldn’t be affected by the action–Treasury is required to replenish the fund. The maneuver bought Treasury about $130 billion in headroom last year.

–Limiting investments in the exchange-stabilization fund, a reserve account related to foreign-exchange holdings. The government has about $23 billion in securities in the fund.

When the Treasury took these steps in 2011, it extended the timing of reaching the debt limit from early May to early August. So if you apply that to the current circumstances, the US would reach the limit of its borrowing capacity by late February or early March. I would actually say that they could probably extend it to mid-March, because the government is borrowing less now than in mid-2011, and because an expected increase in top-end tax rates should bring in more revenue, albeit a limited amount, in the short term.

But there’s no way the US could go beyond the middle of March without increasing the debt limit. And Republicans see this as a source of leverage for limiting spending and the scope of government. The debt limit has become a weapon, and the White House will find it difficult to stuff that genie back in the bottle.

The White House has said it will not negotiate on raising the debt limit at all. We don’t know what Treasury would do, exactly, if the debt limit get reached. They could prioritize certain payments, and only have the government operate business out of current funds. Or they could sell off assets, or delay certain payments, or reduce all payments by a prescribed amount.

Whatever the case, it would look like a massive retrenchment of government, and would absolutely cause major damage to the economy. Even the use of extraordinary measures last year, and the ensuing debate, cost taxpayers $18.9 billion. So expect the same unnecessary losses this time around.