The greatest garage sale
By Daniel M. Ryan
As the U.S. Treasury bumps against the debt ceiling, there are already calls for it to sell off assets so as to keep the spending machine rolling. As presumably the most liquid asset, the United States' gold reserve is the one most frequently pointed to. Ron Paul has advocated that the Treasury sell the hoard, and Gary North has defended him.
Whether or not the U.S. government should sell assets is a different question from whether it should sell assets to get around the debt ceiling. The Treasury has already issued a statement, by Assistant Secretary of the Treasury Mary J. Miller, which says it would be impractical to do so. An examination shows that Ms. Miller, although not quite accurate on the details, is right.
Why Asset Sales Won't Avoid The Need To Belt-Tighten
Assuming that the debt ceiling is not raised in the next several months, it's tempting to think that the Treasury can sell the gold reserves to keep the spending flowing. After all, Treasury has a lot of gold: the World Gold Council estimates its holdings to be 8.133.5 tonnes. The Department of the Treasury reports that it has 258,641,851.485 ounces of bar gold and 2,857,047.831 ounces in the forms of coins and blanks, for a total of 261,498,899.316 ounces. Assuming by some miracle that Treasury could sell all of that gold at $1,500 an ounce, the proceeds would be $392,248,348,974 – a little less than 400 billion dollars.
Treasury also publishes a monthly tally of the deficit, available as a PDF file. The deficit for the most recent month, April, was $40.488 billion. For the previous month, it was $188.153 billion. The monthly average of the last twelve months reported, from May 2010 to April 2011, is $113.7 billion. Assuming that the deficits for the next several months average the same, selling all the gold at near present market price will only let the government run as usual for less than four months. It's a four-month stopgap, perhaps five if the numbers going forward are significantly less than that average.
That's assuming the government can sell the gold right away at near market prices. Any attempt to do so would swamp the bids at the price. Only a small percentage of Treasury gold would be sold on the same day. Moreover, there's a logistical difficulty not often mentioned.
If you have enough money to do so, you can find out what it is by ordering a 1,000-oz. silver bar. Make sure to get one that's specified "good delivery," which means that it's certified as being sufficient in weight and purity to back a paper certificate of ownership of the silver. A COMEX silver futures contract has a face value of 5,000 oz. of silver. If you sold a contract, you could deliver five of those bars and satisfy your end of the contract once it expires.
That is, if the five bars are still guaranteed as good delivery. If you buy a 1,000 oz bar and store it in your own personal Fort Knox, and later go to sell it, you'll find out that it's not as easy as selling 1,000 shares of the iShares Silver Trust. Bars can only be guaranteed to be good delivery if they're both certified as such and are in the COMEX warehouse storage system. A bar that's pulled out of the system, even if guaranteed good delivery when it was, is no longer subject to the guarantee. There's no way for the COMEX to ensure that the bar has not been subject to damage of some sort once it's gone from the warehouse system. There are a limited number of warehouses that COMEX recognizes, but home storage isn't one of them. Nor is a safety-deposit box.
If you bring your bar back and try to represent it as good delivery, you'll have to have it assayed. That not only costs a small fee, but also costs some time. If you're wealthy enough to buy five 1,000-oz silver bars, store them in a home safe, sell a futures contract later and then present your bars to fulfill your obligation, you'll have to wait and have them assayed and re-certified as good delivery before you can discharge your obligation. If even one of them isn't, you're on the hook for the balance. Exactly the same stricture applies to gold bars, which are more easily damaged because gold is a malleable metal. No-one knows if any damage, or how much damage, Treasury's gold bars have endured while in Fort Knox and other places like the New York Fed's depository. That's why Treasury's bars would require assaying.
The standard bar for a gold futures contract is now 100 ounces. Back in the olden days, when gold was much cheaper, a standard bar was 400 ounces. As noted above, Treasury said it had 258,641,851.485 ounces in bar gold. Since it acquired the gold a long, long time ago, the metal's almost certainly in the form of 400-ounce bars.
A brute division of Treasury's figure by 400 ounces yields a figure of 646604.6287125 400-ounce bars. Since 400-ouncers aren't exactly 400 ounces, it would be reasonable to assume that there are 646,600 bars – most of which have an amount a tiny bit greater than 400 ounces.
If we assume that a competent assayer can certify one 400 ounce bar as good delivery in one minute, including the time needed to fetch and then truck the bar away, it will take 646,000 person-minutes to certify that the U.S. Treasury's entire holdings are in good-delivery form. That's 10,767 person-hours, or more than five person-years of full-time assaying. One hundred assayers would still take close to a month to work through all of the bars – and those assayers have to be certified themselves. Those assays and certifications have to be effected before the gold can be sold on the spot market. Otherwise, the exchange through which they're sold can't guarantee the quality of the bars, which would be enough to block a sale through it.
There's already one bottleneck: exhausting the bids and having to wait for more to come. Even if the U.S. Treasury dumps the gold for as low as $1,400 an ounce, provoking a plummet in gold, there still have to be buyers with ready and available money to purchase the bars even at that price. It'll take time even if the Treasury sells in a hurry and provokes a major decline.
Treasury has so much gold, they're like the holder of 1 million shares of an illiquid penny stock. Dumping said stock with an at-market order will result in a far lower price being garnered than a limit order would. There's also a real chance that such a dump will leave some of the shares unsold, because there aren't enough bids at any price to take them up. Granted that the gold market is far and away more liquid than that of a penny stock, but Treasury's holdings are far and away much larger than anyone's.
As discussed above: even if Treasury wanted to dump all its gold, it couldn't unless the gold is assayed to meet exchange standards. They couldn't hold an instant fire sale even if they wanted to…and the money may not get there in time to avoid the need for spending restrictions. Even if robo-assayers are used.
The only way around that assay stricture is for the Treasury to sell the gold to an institution that trusts the Treasury implicitly. The only qualifiers are the IMF and other central banks, which do not have the ready wherewithal to take more than a small fraction of the Treasury's gold even if they wanted to.
Even if the Treasury does put in place an assay assembly line, and manages to sell the gold - and collect the proceeds – as fast as it can get the gold certified as saleable, the gold and money would still run out after several months. Then, it's back to the old drawing board unless the debt ceiling has been raised.
The gold, despite it being one of the U.S. Treasury's most liquid assets, is very hard to get rid of quickly. How much more difficult would it be to sell illiquid assets, like government land? Anyone who's ever sold a home knows how cumbersome the procedure is, even if there's a legal title deed and the property is properly surveyed. What if neither is true? How much work would it take to survey the land and attach it to a legally valid transferable title deed? Especially if the initial ownership records denote a huge tract of land, which has to be divided up in order to make saleable?
It would be more feasible to sell assets from the TARP program, but there aren't that many left. A large majority of the preferred shares have either been sold back to the issuers or converted to common equity and later sold to third parties. The Citigroup stake, the largest, has already been gotten rid of.
As for student loans, a similar logistical difficulty exists – unless the U.S. government, and the buyers of those loans, want to risk another robo-signer scandal.
The only large-enough stash of liquid securities that Treasury could tap are outside of its legal reach. The Federal Reserve has more than two trillion dollars' worth of Treasury securities and mortgage-backed securities. The trouble is, they're owned by the Federal Reserve. Treasury has no legal right to the proceeds even if they were all sold. The only monies that Treasury can receive from the Fed are earnings over and above dividends paid to member banks.
It's possible that the Treasury could take over the Federal Reserve – in a sense, expropriate it - but that would require enabling legislation, which entails a number of logistical difficulties all its own. Ron Paul's audit-the-Fed bill foundered despite having more than three hundred co-sponsors. A more radical bill, which a Treasury take-over of the Fed would be, would result in even more blockage.
Mary Miller is right; the notion that the U.S. treasury can quickly and easily dispose of hundreds of billions of dollars of assets founders on the logistical difficulties of doing so. Given those difficulties, it would be easier for the Obama administration to cut a deal and lower spending so as to get the debt ceiling raised. As shown above, the Treasury would almost surely have to tighten its belt anyway. The assets are there, but the liquidity isn't.
The first rule of logistics is, "there's no such thing as a magic teleporter." The same rule most definitely applies to transactions that could theoretically yield hundreds of billions of dollars. In fact, the logistical difficulties mount with the sums. If it's time for the U.S. government to sell assets wholesale, those sales have to be done for reasons unrelated to the debt ceiling. The hope that a spending pinch can be avoided by asset sales is a false hope.