The countdown is on and the end is near. If the US Congress doesn’t act this month, the consequences for the economy could be catastrophic, Treasury Secretary Janet Yellen said. Yellen sent a letter to Republican and Democratic leaders in the House of Representatives on Monday urging them to approve or suspend the debt ceiling. Otherwise, the federal government could run out of money as early as June 1 to meet its obligations.
The political fight is over. Republicans, who hold a majority in the House of Representatives, want to impose cuts on the Joe Biden administration in exchange for a debt ceiling hike, but cannot endure the unpopularity of saying which ones. They are also demanding that Biden lift some of his star measures from mid-term. They passed a bill to that effect, but it has no future in the Democrat-controlled Senate.
The White House also sees it as blackmail and is demanding an unconditional increase in the debt ceiling. Biden called the congressional leaders to whom Yellen’s letter was addressed this Monday to invite them to a meeting Tuesday next week, May 9, at the White House. You are Kavin McCarthy, Speaker of the House; Hakeen Jeffries, leader of the Democrats in this chamber; Chuck Schummer, leader of the Senate Democrats, and Mitch McConnell, leader of the Republican minority in the House of Lords.
The debt limit was reached in January and the Ministry of Finance has created a small cushion with extraordinary measures. The fight didn’t have a deadline until this Monday, with Yellen’s new letter. “After reviewing recent federal tax receipts, we anticipate that if Congress does not raise or suspend the debt limit by that date, we will not be able to meet all of the government’s commitments in early June and potentially as early as June 1.” “, he says.
Yellen explains that this estimate is based on currently available data because federal revenue and spending are inherently variable, and notes that the actual date the Treasury Department exhausts the extraordinary measures could be several weeks later. “It is impossible to predict with certainty the exact date when the Treasury Department will be unable to pay government bills,” he adds.
The Treasury Secretary warns against taking action as soon as possible: “We have learned from previous debt limit impasses that waiting until the last minute to suspend or raise the debt limit can seriously damage business confidence for governments and consumers, increasing the cost to governments.” short-term credit to taxpayers and hurt America’s creditworthiness,” he says.
In the past, even threats that the US government could default have done real damage, including the only downgrade in US history in 2011 when it lost AAA.
The debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military payrolls, interest on federal debt, tax refunds, and other payments. It is currently at $31.381 trillion.
“Failure for Congress to raise the debt ceiling would cause serious hardship for American families, harm our global leadership position, and raise questions about our ability to defend our national security interests,” the Treasury Secretary said in her letter.
In extreme cases, the federal government’s default on debt could lead to an unprecedented debt default that would shake markets and plunge the country into recession.
Instead of defaulting on the debt, the United States could try to implement creative solutions to avoid exceeding the limit. For example, issuing debt securities with a low face value but very high interest rates. This would allow it to obtain more resources without exceeding the face value of the outstanding debt. The possibility of issuing a multi-million dollar bill or coin to cover expenses was also considered as a theoretical hypothesis. All of these alternatives have contraindications, but not as many as debt suspension.
The Treasury began extraordinary measures in January but continues to act to buy time. Yellen has announced that it is suspending the issuance of State and Local Government (SLGS) Treasury Securities. SLGS are special government bonds issued to states and local governments to help them comply with certain tax regulations. When the Treasury issues SLGS, they are discounted from the debt limit. The Treasury Department notes that it is taking this action to manage the risks associated with the debt limit, “but it is not without cost as it removes an important tool from state and local governments to manage their finances,” it says.
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