Musk's Recklessness Risks Financial Catastrophe

DOGE's efforts to access the Treasury's payment systems create an unacceptable risk of default on America's debt.

Shortly after President Trump’s inauguration, the newly formed Department of Government Efficiency (DOGE) began spreading around the federal bureaucracy, burrowing into various agencies. Led by billionaire Elon Musk, DOGE’s remit is to identify cost-cutting measures for the federal government, aiming to reduce America’s deficit. If things go awry, however, these measures could end up costing Americans far more than they save.

In an effort to block politically disfavored payments, DOGE staffers have pursued direct access to the Treasury’s payment systems. This fact, when combined with Musk’s belief that the United States is going “bankrupt,” creates the nauseating possibility that DOGE may attempt to freeze interest payments on US debt. Pushing America into deliberate default would have unfathomable economic and financial repercussions.

While this risk may appear small, the consequences are severe enough to warrant urgency. For now, a temporary injunction has blocked DOGE’s access to the most sensitive systems until at least Friday. Given that Republicans are happy to go along with Musk’s antics, however, Democrats must not rest until the Treasury’s payment systems are solely controlled by the agency’s career civil servants.

Catch Up: What’s Happening at the Treasury?

DOGE is a temporary organization created by executive order on January 20^th, the day of Trump’s inauguration. Despite its name, DOGE is not a formal department à la the Department of Defense, the creation of which requires Congressional approval. The organization is led by Elon Musk, Trump’s largest campaign donor, as a ‘special government employee.’¹

Shortly after installing themselves at the US Treasury, DOGE staffers began pushing for unfettered access to the Bureau of the Fiscal Service, the “pulsating payments heart” of the US government. In 2023, the Fiscal Service was responsible for executing an astonishing $5.4 trillion in payments, around 90% of all federal expenses — including Social Security benefits, veteran’s payments, and interest on Treasury securities.

Initially, the Fiscal Service’s team resisted DOGE’s efforts, citing privacy and operational concerns. On January 31^st, however, the Trump administration pushed out the highest-ranking career official at the Treasury after he clashed with DOGE allies. In an interview with Bloomberg on February 6^th, recently appointed Treasury Secretary Scott Bessent dismissed concerns over the DOGE team and affirmed that he’s “completely aligned” with Musk’s efforts.

Much media speculation has centered around whether the DOGE team has ‘read’ or ‘write’ access to the Fiscal Service’s systems. The former would imply that DOGE aides can only view data, while the latter would involve editing and creating new files. In the Bloomberg interview, Bessent confirmed that the team’s access was limited to read-only.

This assertion strongly conflicts with sources from inside the Treasury, however.² Reporting from Wired confirms that DOGE staffers had direct access to two of the most sensitive payment systems at the Fiscal Service. Further reporting from Talking Points Memo indicated that at least one staffer had already made extensive changes to the code base of these systems. In a letter sent to Bessent, the top Democrat on the Senate’s Finance Committee accused the Treasury of misleading Congress about the nature of DOGE’s access.

On the same day as Bessent’s interview, a federal judge in DC issued an order ostensibly restricting DOGE to read-only access to the Fiscal Service’s data. The ambiguous phrasing of the order, however, appeared to allow DOGE to continue making direct code changes. Finally, early on February 8^th, a federal judge in New York issued a much more stringent block of DOGE’s access to the Treasury’s systems.

This latest order is just a temporary injunction, with a full hearing set for February 14^th. In the meantime, it’s anyone’s guess how effective enforcement of the order will be. Judging by last weekend’s standoff at the US Agency for International Development, where Musk reportedly threatened to involve the US Marshals, DOGE may not be willing to relinquish access without a fight — legal or otherwise.

No, This Is Not About Fraud

To justify why DOGE could possibly need such extensive access to the Fiscal Service’s systems, Musk has maintained that the Treasury has an endemic practice of making illegal payments. According to Musk, “payment approval officers at Treasury were instructed always to approve payments, even to known fraudulent or terrorist groups.” Musk further claimed that Treasury officials are breaking the law “every hour of every day.”

This justification, however, makes no sense in the context of how government payments actually work. For starters, the Treasury already has a system that filters and rejects payments to certain recipients, such as dead people and terrorists. More fundamentally, the Fiscal Service is not responsible for vetting individual payment requests. That obligation lies with the agency that requested the payment and the certifying officer who approved it.

No one doubts that government spending fraud is a serious issue. It would be incredibly odd, however, to start with the Fiscal Service’s payment systems to clamp down on this fraud. In fact, the evidence suggests that the true motivation for DOGE’s attempted Treasury coup is to allow Musk and team to directly block politically disfavored expenses.³

Shortly after the DOGE team gained access to the Treasury’s systems, Musk vowed to cancel government grants to a charity providing social services to immigrants and refugees. Moreover, reporting from the Associated Press indicates that DOGE staffers sought to use their Treasury access to cancel payments to the US Agency for International Development, an organization that Musk boasted about “feeding… into the wood chipper.” Concerns about fraud are likely nothing more than a fig leaf for Musk’s true aims.⁴

Musk’s attempts to unilaterally cancel this spending are almost certainly illegal and lawsuits are already underway. While there have been pitiable real-world consequences due to these efforts, financial markets have managed to largely escape unscathed. If DOGE attempts to block the wrong kind of payments, however, that may not be true for long.

Musk Could Trigger a Deliberate Default

Among the many forms of government spending that Musk views as wasteful is interest on the US national debt. Both Musk’s super PAC and DOGE have identified America’s burgeoning interest bills as a problem to be addressed. In the past, Musk himself has asserted that America is “on the path to bankruptcy.”

Regular readers of Banking Observer know that, as a monetary sovereign, America is not on a path to bankruptcy. As a currency issuer, the federal government can always pay its interest bills — no matter how high. Nonetheless, Musk’s beliefs create the very real risk that DOGE attempts to leverage access to the Fiscal Service to halt payments on US Treasuries, triggering a deliberate default on America’s debt.

Refusing to pay amounts legally owed would not seem to be out of character for Musk. After Musk’s takeover of Twitter, the company faced numerous lawsuits alleging that many bills were simply left unpaid, including office rent and server costs. This strategy of stiffing vendors and dragging out the inevitable lawsuits is similar to tactics reportedly employed by Trump.

It is seriously hard to overstate how catastrophic the financial consequences of a deliberate default on America’s debt could be. The entire global dollar-based financial system (including ~$28 trillion in outstanding Treasuries, ~$62 trillion in listed US equities, and ~$90 trillion in global dollar-denominated fixed-income assets) is valued based on the belief that Treasury yields provide a ‘risk-free’ benchmark rate.⁵ If that belief is violated, this system will grind to a halt.

In the immediate aftermath of a deliberate default, spiking yields will result in plunging asset values and a severe stock market crash. Shortly thereafter, global credit markets will freeze up, leading to mass failures of banks and other financial institutions. When it comes to economic consequences, it would not be unreasonable to expect unemployment and bankruptcy levels more severe than the Great Depression.⁶

It might seem far-fetched to think that DOGE would attempt to freeze Treasury interest payments in order to slash government expenses. A year ago, however, it also seemed far-fetched to think that one of the world’s richest men would soon be serving as an unaccountable instrument of the executive branch with direct access to the government’s payment systems. Even if the probability of deliberate default is small, the consequences are too severe to ignore.⁷

In an op-ed for Bloomberg, two former Treasury officials agreed that default is a real, concerning, and overlooked possibility:

“The Silicon Valley ethos of ‘move fast and break things’ is a reckless and dangerous approach to the world’s safest financial asset. The government’s failing to make payments doesn’t amount to cutting spending; it’s a default on our obligations. It would have ripple effects for our nation’s credit rating, borrowing costs, and the Treasury markets. Ultimately, it would destabilize the global financial system.”

Musk is on a mission to slash government expenses, thinks the United States is going bankrupt, believes that interest payments are wasteful, has been repeatedly accused of not paying his bills, and has already demonstrated a willingness to use direct access to the Fiscal Service’s systems to block payments. An individual like that should be nowhere near a position to dictate whether America defaults on its debt. The temporary injunction does not go far enough — the Fiscal Service’s systems should be permanently off-limits to anybody except nonpartisan career civil servants.⁸

Conclusion: Democrats Must Act

Banking Observer is not meant to be a political blog, but it is worth emphasizing that DOGE’s attempts to control government spending represent one of the most significant constitutional crises in modern American history. Through DOGE, the executive branch is currently attempting to seize the power of the purse, which is constitutionally assigned to Congress.⁹ The political response to these efforts has been disappointingly milquetoast.

Putting default risk aside, DOGE is currently attempting to gut the Department of Education, the National Oceanic and Atmospheric Administration, and the Department of Health and Human Services. Without congressional approval, the executive branch is not legally allowed to cut appropriated federal spending any more than it can unilaterally implement increased taxes. This says nothing about the significant privacy issues relating to DOGE’s access to sensitive personal information and seemingly lax approach to security (privacy concerns formed the basis of the lawsuit that led to the temporary injunction).

The fact that DOGE’s efforts are being led by an unelected individual with no government experience and overwhelming conflicts of interest is even more embarrassing. While Democrats may be winning the slow-moving legal battle, they are losing the fast-moving political one. Democrats must fight more vigorously — America’s constitutional system, and quite possibly her economy, depend on it.

Thoughts on this article? Please share them by replying to this email, leaving a comment, or sending a message to contact@bankingobserver.com

Preview Image: Tesla Owners Club Belgium

1. SGE status removes some conflict of interest hurdles, but it does not eliminate them entirely. Federal rules still bar an SGE from participating in matters that affect their financial interests. Moreover, SGEs are only allowed to serve for 130 days or less in a 365-day period. Given Musk’s apparent poor track record of adhering to federal regulations, it would not be surprising to see him violate one or both of these rules before his time at DOGE is up.

2. Specifically, Bessent likely conflated read-only access to code and read-only access to payment records. Staffers could still theoretically block payments by rewriting the underlying code base while still technically having read-only permissions to the actual payment records.

3. One point worth noting here is that even if Musk were truly just concerned about government fraud, the optimal amount of fraud is not zero. As a general heuristic, every rule that makes it harder for fraudsters to cheat the system also makes it harder for genuine actors to receive legitimate payments. Eliminating every cent of government fraud would not only be enormously expensive but also make it much more onerous for people to access benefits or do business with the government.

4. This playbook seems to be very similar to Musk’s strategy of claiming that Twitter was rife with fake bot accounts in an effort to cancel his acquisition of the platform.

5. It’s hard to find exact data on the size of the global dollar-denominated fixed-income market. This $90 trillion figure is an estimate coming from the sum of America’s $51 trillion domestic bond market and the fact that about half of the remaining $81 trillion international bond market is denominated in dollars.

6. One looming question over this hypothetical disaster is how the Fed might react. We know that the Fed has indicated a willingness to purchase defaulted Treasuries or lend against them at their face value to prevent chaos in the event of a technical default due to the debt ceiling. Employing that strategy in the event of a deliberate default, however, is a far more controversial maneuver, and it’s not at all clear that the Fed has the willingness or the authority to do so.

Another issue is that one of the Fed’s administered rates (the reverse repo rate) essentially requires the market to be willing to accept Treasuries as collateral in order to function. As such, deliberate default could partially break the Fed’s ability to effectively fix interest rates (at least using their current toolkit).

7. While this article focuses on the deliberate choice to default, there is also the (potentially more frightening) possibility of an accidental default stemming from inexperienced programmers making changes to the code that runs the Treasury’s payment systems. These are decades-old systems written in COBOL and it’s not clear how long it would take to fix broken code being pushed into production. There is some historical precedent for this concern — in 1979, technical errors resulted in the US defaulting on a batch of Treasury bills for about three weeks.

8. One group that has been notably silent during the DOGE-Musk affair has been the credit ratings agencies. In the past, both Fitch and S&P have downgraded US debt from AAA status due to governance concerns, particularly surrounding the debt ceiling. The fact that someone like Musk can get such direct access to the Treasury’s payment systems should only amplify these concerns.

9. Even freezing payments for an extended period of time would likely fall foul of the Impoundment Control Act of 1974. For more on impoundment, see Lawfare.