What one tiny little loan to the U.S. government shows us about the debt ceiling : Planet Money We make a loan to the U.S. government, and it does not go the way we thought it would. Plus: the story of that one time the U.S. defaulted. Subscribe to our weekly newsletter here.

Day of the debt

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SYLVIE DOUGLIS, BYLINE: This is PLANET MONEY from NPR.

(SOUNDBITE OF MUSIC)

KENNY MALONE, HOST:

A few weeks ago, as part of this story, I was trying to loan the United States government some of my money because apparently the United States government is about to run out of cash - if Congress fails to raise the debt ceiling. Now, usually it's gigantic institutional investors, foreign central banks that are lending the U.S. money. But regular people can do this, too. You go to the TreasuryDirect website, where I was somewhat surprised to learn I had apparently created an account years ago. I guessed my username, my password fine. But then I hit my security question, which was, what is my favorite movie?

(SOUNDBITE OF PHONE RINGING)

MALONE: Proved to be a bit of a problem.

ART: Treasury Services. My name is Art (ph). How may I help you?

MALONE: Hey. I'm locked out of my account.

ART: OK.

MALONE: I explained to Art that I had guessed "Lord Of The Rings," then "Mad Max: Fury Road," then "Fellowship Of The Ring." And that is when I got locked out.

Now I'm really curious. Like, what is my favorite movie?

(LAUGHTER)

ART: Well, I have other questions. What is the location of your dream vacation?

MALONE: Art starts asking me some other security questions. And look; the reason we're going through all of this is because we figured maybe something interesting will happen if we are actually holding debt as the country heads towards another debt-ceiling deadline - debt that we would be able to hold once I answered these other security questions.

Washington, D.C.

ART: Correct. Yeah.

MALONE: Great.

Finally, Art says he can reveal what it was that I actually listed as my favorite movie.

ART: So going back to the first question, it looks like the favorite movie was "Moonlight."

MALONE: "Moonlight." Oh.

ART: I hope I didn't lock the account here, so you should be able to get back in.

MALONE: Thank you so much. Have you seen "Moonlight"? It's great.

ART: I have not, but I have heard of it, though, so...

MALONE: It's my favorite movie, Art. I don't know if you're aware of that.

ART: (Laughter) I will have to check it out.

MALONE: All right. Thank you so much. Now I can buy some government debt.

ART: (Laughter).

(SOUNDBITE OF MUSIC)

MALONE: Hello, and welcome to PLANET MONEY. I'm Kenny Malone.

First came Toxie, the toxic assets, then Delawho, the tax shelter. Today we welcome the newest little member of our PLANET MONEY team, a Treasury bill - name to come. A T-bill is one of the simplest units of government debt. And it can also be, like, this seismograph that detects vibrations in the economy, points out tremors in market confidence.

Today on the show, the PLANET MONEY T-bill experiment. Will we get rich? Will we go broke? No, neither of those things. T-bills are the definition of low risk, low reward - a symbol of how the United States government always pays its debts. Except there was that wild moment in 1979 that we'll talk about, too.

Chapter 1 - Little. That's how the movie "Moonlight" starts - in this case, a little T-bill.

CARDIFF GARCIA, BYLINE: You're going to try to buy, if I'm not mistaken, a Treasury bill.

MALONE: Not try, Cardiff. We're buying government debt.

GARCIA: We're going to do it.

MALONE: Cardiff Garcia, former co-host of PLANET MONEY Indicator, current host of a new podcast called "The New Bazaar" and exactly the kind of nerdy, excitable companion we would need on this mission. So let's start with a little government loans 101. Basically all the time, the U.S. government spends more money than it brings in through taxes. And so it has to borrow lots of money constantly to keep running. It has to issue debt

OK. Can you see my screen?

GARCIA: Yes, I can. You are at the TreasuryDirect website.

MALONE: Great. So these are our debt options here - bills, notes and bonds.

GARCIA: So all of these are different kinds of government debt. But they each expire within different time frames.

MALONE: OK.

Bills, notes and bonds are the three most common ways the government borrows money. If I buy a Treasury note or a bond, that is like giving a longer-term loan to the government - maybe two years, 10 years, 30 years. A Treasury bill is the shortest loan. It is less than a year.

GARCIA: It is just about the single safest investment you can possibly make, with the possible exception of, like, loaning me 10 bucks.

MALONE: You personally, Cardiff Garcia?

GARCIA: Yeah, me, for a salad or something (laughter) - I'm good for it.

MALONE: The T-bill is incredibly low risk because, like all government debt, it is a loan to the United States government - a stable country that gets to tax one of the biggest economies in the world. But because a T-bill in particular is the shortest loan that you can make to the government, it is the least risky kind of government loan. Like, imagine if you were going to lend the government money for, let's say, 30 years. There's economic uncertainty built into that. There's even some teeny chance that the U.S. government falls apart between now and 30 years. But if I loan money to the government for four weeks, like, that's no problem. They are going to pay me back. And so we are going to buy this very unrisky T-bill.

All right - purchase amount.

GARCIA: I think the minimum there, I think, is a hundred bucks, right?

MALONE: A hundred bucks. I feel like that's all I want to loan the government right now.

GARCIA: The government could buy a ticket on Broadway with the amount of money you're lending.

MALONE: Oh, a good seat, a good seat, though.

GARCIA: These days, yeah.

MALONE: By clicking submit - oh, God. I don't want to read this.

GARCIA: That is some small print right there. I certify that I am authorized to perform transactions.

MALONE: Yeah, sure. Fine. Fine. Submit. Submit. Go for it.

GARCIA: Yeah. Go for it - just sending money to the government and seeing what happens. OK - confirmed.

MALONE: Oh, that's it.

GARCIA: Yeah. You're done.

MALONE: So I just bought government debt.

GARCIA: You did. You are scheduled to buy government debt.

MALONE: Yeah. I guess I have preordered. I am expecting a little baby T-bill in the next few days. And in the olden days, I could actually get a certificate. But our T-bill will show up as some digits in my account. What should we name this boring little security?

GARCIA: Name the little T-bill?

MALONE: Yeah.

GARCIA: Yeah. Why don't - we want to capture the safety of it. What's an enveloping blanket of warmth, feeling of security?

MALONE: Weighted blankets, cups of cozy tea. I guess we could also call him Mr. T-bill is also, like, a really...

GARCIA: Mr. T-bill. All right.

MALONE: You know what makes me feel cozy? Knowing that Mr. T would be around.

GARCIA: If you're palling around with Mr. T., you're feeling good.

MALONE: I would feel safe, feel secure. I also feel like Mr. T is is always good for a few bucks since he's always wearing a bunch of gold.

GARCIA: Mr. T-bill. All right.

(SOUNDBITE OF TV SHOW, "THE A-TEAM")

MR T: (As B.A. Baracus) I want to go up there, grab this dude by his heels, shake him upside down and shake all the money out his pockets that he owe these people.

MALONE: So safe, so secure. In fact, Mr. T-bill is arguably the safest investment on earth. I am loaning the minimum allowable amount of money to one of the most reliable borrowers in the world. And I have chosen to lend that money for the shortest amount of time possible, just four weeks. I am 0% worried that the U.S. government will pay me back with interest. How much interest? Well, Cardiff pulls up a chart of the going interest rates for T-bills.

GARCIA: Oh, yeah. You're likely to get something along the lines of, like, .05%, I think, is what you...

MALONE: Point zero - so is that...

GARCIA: Point.. I think it's, like...

MALONE: Five cents.

GARCIA: Not even because you would only get 5 cents if you invested for a whole year straight. So for just this four-week T-bill, you would actually just get less than one half of a cent, actually. In fact, let me put it this way. If you were to round to the nearest cent, you would be rounding to zero.

MALONE: OK. OK. That's bad.

GARCIA: I don't know of anything that would pay you less. But, again, Kenny, that makes perfect sense, right? You're not supposed to be able to make more money than this because the government, again, is the safest place where you can invest your money. And you're barely doing it for any amount of time. I mean, you're just giving the government money for a few weeks, and then you're going to get it back. And when you know they're good for it, why would they offer a higher rate than that?

MALONE: And this is a huge deal. It is one of the great privileges of being the United States government. It can borrow money for almost nothing, and that makes it much much cheaper if the government needs to borrow money for, say, you know, a giant pandemic or to fix crumbling infrastructure or whatever. Now, one of the keys to this superpower is trust. The U.S. has a rock-solid reputation for paying its debts.

But this is where the debt ceiling comes in. In 2011, the Standard & Poor's rating agency - S&P - downgraded the U.S. debt for the first time in history in large part because the debt ceiling has become this political game. So, for example, if the U.S. doesn't raise the debt ceiling in the next few weeks and borrow more money, then there is a chance it won't be able to pay back its existing lenders like me or, I, guess me once Mr. T-bill actually arrives. But, like, look. It has never gotten to that point with these super-safe T-bill. In modern history, the United States has never ever defaulted.

DICK MARCUS: When you say the government never ever defaulted, that's not exactly correct.

MALONE: Finance professor Richard Marcus.

MARCUS: Yeah. Call me Dick Marcus. I've been at the University of Wisconsin Milwaukee in the Lubar School of Business since 1985.

MALONE: We called Dick because there is a valuable lesson in this one time in modern history the government did technically default on our T-bills. And Dick is the expert on this story of what is a somewhat entertaining mess. Now, the first thing you need to know is that today the Treasury pays back its debts electronically. This was not, however, the case back when Dick's story takes place, 1979.

MARCUS: At the time, the Treasury was mailing checks to people.

MALONE: But it is like just, like, breathing for the Treasury, right? It just - these checks go out, like, I assume - what? - tens of thousands of these things are...

MARCUS: Yes. It would be like sending out the bill from Sears or something. You just knew when it was going to be mailed out.

MALONE: But in the spring of 1979, there were some troubles. Similar to today, actually, Congress had waited to the last second to raise the debt ceiling, which meant that time was tight for the Treasury to send out checks. And then apparently the Treasury also had some kinds of, like, word processing problems.

MARCUS: The fact that the word processing machines weren't working - that, it's hard to understand. You know, sometimes a machine in your house doesn't work. And, oh, my gosh, it's not working. What am I going to do?

MALONE: Did they try unplugging it and plugging it back in, do we know?

MARCUS: (Laughter) Reboot, reboot. Yes.

MALONE: Now, a bunch of T-bills were scheduled to be paid back on April 26. That day comes, no checks. A bunch more T-bills come due next week, no checks. More the next week, no checks. Now, imagine you were on the other end of that.

MARCUS: I expect that I'm going to be receiving a check for my T-bill, but I didn't get it.

MALONE: And so are investors rioting in the streets? Are they burning cars? Are they flipping out?

MARCUS: Oh, no. There wasn't any demonstration. There was frowning by the people that didn't get their money on time.

MALONE: Frowning, frowning.

MARCUS: And, of course, others that have Treasury bills coming due later in the year start to get nervous as well.

MALONE: And they riot and burn cars in the streets.

MARCUS: No, no, no.

MALONE: But still, by missing those three payments in the spring of 1979, Dick says the U.S. government did in that moment technically default.

MARCUS: From a technical point of view, at least about $122 million worth of Treasury bills went unpaid.

MALONE: A hundred and twenty-two million dollars.

MARCUS: Yes.

MALONE: The U.S. eventually paid everyone back with interest and even settled a lawsuit it maybe didn't need to because at stake here was the government's reputation as a borrower. And sure, this was a tiny, like, technically it was a default but was it really kind of default? But Dick and a colleague realized that this was the perfect moment to see what happens when the U.S.' reliability is called into question even just that teeny bit.

To understand what they found, you have to know that when the government borrows money, it does not set the rates. Like, lenders do. They say, OK, U.S. government, I feel very sure you're gonna pay me back. And so I'll lend you money at this relatively low rate. But then the word processing mix up happened. Checks temporarily didn't get sent. Dick and his colleague found that for six months after that mistake, the U.S. had to pay about point .6% more to borrow money, which may not sound like a big bump, but it added up.

MARCUS: It was about $12 billion at the time. It was a significant impact.

MALONE: So potential lenders are saying, oh, I don't know about this U.S. government. They might default. But they're saying it in the smallest, like, teeny mouse voice ever. They're not asking that much more money, but they are a little more worried.

MARCUS: Yes, I think that's what we would imply. And so we would wish that the Federal Reserve and our Treasury would avoid these kinds of issues in the future.

GARCIA: If some late checks can functionally wind up costing the United States $12 billion, then the lesson I take away is that if you introduce even the teeniest doubt that the U.S. is rock solid on paying back debt on time, it can become a big problem. After the break, we get our piece of the national debt. We finally get our T-bill, the least risky, most boring investment we can imagine, and it ends up surprising us.

(SOUNDBITE OF MUSIC)

MALONE: At 11:30 in the morning on Thursday, November 18, 2021...

(SOUNDBITE OF BABY CRYING)

MALONE: ...Our Mr. T-bill was born.

(SOUNDBITE OF ARCHIVED RECORDING)

UNIDENTIFIED PERSON #1: But I pity the fool.

UNIDENTIFIED PERSON #2: His first words.

MALONE: Now, it is useful to know that government debt does not just appear like magic. There is a whole process to this. And here's how it worked for Mr. T-bill. On that day, November 18, the Treasury functionally created a bunch of T-bills - $10 billion worth. Our T-bill is just $100 of that, but it has the same characteristics as all its, like, siblings or whatever. Mr. T will take four weeks to reach full maturity. That will occur precisely on December 21, 2021. And that is when the government has to pay me back. What is not set, though, is how much interest the government has to pay me. That is the critical piece of information that we get to find out on Mr. T-bill's birthday.

GARCIA: Check, check, level check.

MALONE: You sound good.

GARCIA: Oh. You know what?

MALONE: I called Cardiff Garcia to share this big reveal.

It feels like we're about to get the vitals, like the weight, the head size.

GARCIA: Yes. And we are committed to loving it no matter what.

MALONE: Right.

As we mentioned, the Treasury does not set the interest rates for government debt. What actually happens is it holds an auction where all these huge financial institutions place bids. They assess the risk, and then they say, we'll loan you money, America. But you have to pay us at this rate. So the day our T-bill's rate was being set, I just kept refreshing the Treasury's website all day, waiting for these results for that interest rate.

GARCIA: This is...

MALONE: Boom. Here it is.

GARCIA: This is it.

MALONE: This is Little Mr. T-bill. All right. So...

GARCIA: Yeah. So the interest rate as shown here is .11%.

MALONE: That's - am I wrong that this is, like, double what we thought it might be?

GARCIA: Yeah. That is not what we expected.

MALONE: No.

GARCIA: We had said that it would be about .05% because that is what was being reported by the Treasury Department as the current rate on four-week T-bills. So this is double. And I wonder if what this suggests is that there's a little bit of nervousness about the upcoming debt ceiling...

MALONE: Oh.

GARCIA: ...Deadline. It's possible.

MALONE: Because Mr. T-bill reaches his maturity in the middle of what might be another debt ceiling standoff.

GARCIA: Yeah. Yeah. How about that?

MALONE: Our T-bill reaches maturity on December 21. That is when the government has to pay me back. Our Treasury Secretary Janet Yellen has said that the government could run out of cash by December 15, six days before the government has to pay me for our T-bill. So what Cardiff is saying - and the Department of the Treasury confirmed this to me - is that lenders appear to be just the tiniest bit worried. They seem to think there is a minutely increased chance of something going wrong with the debt ceiling, which could mess up debt payments and specifically mess up the debt payments for the December 21 T-bill, our T-bill.

And we can see this in a kind of amazing way. There is, like, a cousin of our T-bill that comes due a full month later. It's a longer-term T-bill, which is usually higher-risk. But the market thinks it is less risky. It set the rate on that longer T-bill at .05%, which is that same laughably low rate that we were expecting for our T-bill.

GARCIA: Yeah. And so what you can plausibly infer from this is that there is a worry that there might be some kind of a debt ceiling standoff or some kind of confusion in the markets about the debt ceiling in December but that by the time the eight-week Treasury matures, it'll be fixed. And you'll definitely get your payout on the eight-week.

MALONE: Back to the pencil shavings worth of interest.

GARCIA: Yes. I mean, they're both pencil shavings...

MALONE: Oh.

GARCIA: ...Worth of interest. And...

MALONE: I get...

GARCIA: We should...

MALONE: ...Twice as much pencil shavings.

GARCIA: It rounds up to a penny is what I would say.

MALONE: Yeah, yeah.

GARCIA: It rounds up to a penny.

MALONE: From my perspective, this has worked out great. I'm getting double the interest I was expecting. It'll round up to, like, a whole penny instead of rounding down to zero pennies. But from the U.S. government's perspective, this is not so great. With these uncertainties around the debt ceiling, they have to pay twice as much to me and everyone else who loaned them money for this December 21 T-bill.

You know, Cardiff, part of this story was about buying the boringest (ph) of the boring of the boring assets.

GARCIA: Yes.

MALONE: And it ended up being...

GARCIA: Yes. That is...

MALONE: ...Twice as interesting as we thought.

GARCIA: Exactly right. What I would say is that boringness is important. Boringness is useful. Boringness is good, OK? You don't want a financial system that's spiking around all over the place, fluctuating. And so the U.S. offering the world this exceptionally boring security is a good thing. It anchors the rest of the global financial system, which is why even the smallest threat to treasuries is a risk that we really shouldn't be running. It's a dumb thing to be doing. So that is the only point I would make about things being boring. Boring is not bad. Boring is awesome.

MALONE: Mr. T-bill was designed to be our shortest, least dramatic PLANET MONEY project. And there really are only two outcomes here. What will almost certainly happen is that next month Congress will raise the debt ceiling. The government will have plenty of money to pay me when Mr. T-bill reaches his ripe old age of 28 days. And that will be the end of our Mr. T-bill experiment. But on that infinitesimally small chance that things do go wrong and December 21 comes and goes with no virtual check in my treasury account, investors will be more than frowning, I suspect. And we will definitely keep doing stories about our T-bill.

(SOUNDBITE OF MUSIC)

MALONE: If you have ideas for what we should do with Mr. T-bill, let us know. His time is ticking. We are planetmoney@npr.org and at @PlanetMoney on social media. Today's episode was produced by Dave Blanchard, edited by Molly Messick and engineered by Andy Huether. Ebony Reed and Louise Story are our senior consulting editors. Alex Goldmark is our senior producer. Special thanks this week to my T-bill co-parent Cardiff Garcia, whose new podcast is "The New Bazaar." I'm Kenny Malone. This is NPR. Thanks for listening.

(SOUNDBITE OF MUSIC)

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