A big source of deposits for the government is usually the government selling bonds. And that's where the debt ceiling comes in: if the government cannot sell any more bonds because it's hit the debt ceiling, it won't have the funds to pay for all those things it makes withdrawals for. That includes Social Security checks and interest payments on the debt.

So what happens next?

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.

Millions of Americans have overdraft protection on checking accounts that allow them to write checks in excess of the amounts deposited in the accounts. These are sometimes controversial because banks often attach high fees to overdrafts, which mean that you could put a $3 cup of coffee on your debit card and get hit with a $35 fee. But those kind of fees are generally waived for very wealthy bank customers who, ironically, enjoy feeless overdrafts.

When I was a lawyer I was never terribly wealthy. But I did enough business with my bank that it gave me a free overdraft. If I could have that kind of protection as a young associate in my 20s, shouldn't Treasury Secretary Tim Geithner be able to get the same deal from the Federal Reserve bank he used to run?

In truth, the Obama administration is either fibbing or misunderstanding the financial system. The United States almost certainly enjoys unlimited overdraft protection from the Federal Reserve because there is almost zero chance the Federal Reserve would ever bounce a check written by the U.S. government.

Think about it. The check comes into the Federal Reserve. It looks at the U.S. government balance and discovers that we're at zero. What does the Federal Reserve do?

I'm pretty sure the Federal Reserve would go ahead and credit the bank submitting the check with the deposit to account for the fund transfer.

Legally, this is a bit murky. It's not clear that the Federal Reserve would be required to clear a check that exceeded the amount on deposit. It may be within its authority to reject the check.

But rejecting a check written by the government of the United States would probably violate the dual mandate of the Fed to pursue maximum employment and price stability. A U.S. government that bounced checks would just introduce so much chaos the Fed would likely be obligated by its core mandates to credit the check.

This leads to the next question: Would having the Fed credit the account of a bank that presented a check on the U.S. Treasury Department's empty account amount the incurrence of new debt in violation of the debt ceiling?