Treasury to invoke “extraordinary measures” as Congress misses debt ceiling deadline
The Treasury Department will begin taking emergency liquidity conservation measures on Monday to avoid going over the federal borrowing limit after a two-year debt ceiling suspension expires in late July.
Economists say the so-called extraordinary measures will allow the Treasury to pay off government bills without floating new debt for two to three months. After that, Congress will either have to raise or suspend the borrowing limit or risk the United States defaulting on its obligations.
The limit, a facet of U.S. policy for over a century, prevents the Treasury from issuing new bonds to fund government operations once a certain level of indebtedness is reached. This level reached $ 22 trillion in August 2019 and was suspended until Saturday.
The new debt limit will include additional borrowing from Washington since the summer of 2019. The Congressional Budget Office estimated in July that the new limit will likely reach just over $ 28.5 trillion.
Although the federal government has never defaulted, economists say such an event would have disastrous effects on the US economy by driving up interest rates.
“The government needs funds, for example, to pay interest on its debt, and if it were to stop paying interest, that could be extremely destabilizing for financial markets,” Karen Dynan, professor, told CNBC Thursday. of Economics at Harvard University.
These funds are needed to pay government employees and send Social Security checks, said Dynan, a treasury official under the Obama administration. “People depend on this money and could face a lot of hardship if they don’t get it as planned.”
Yet an almost certain economic calamity hasn’t stopped politicians from using the debt ceiling as political football over the years.
During the Obama administration, Republicans often used the specter of default as leverage to get spending cuts and other political priorities from the White House in exchange for a vote to raise the debt ceiling.
But with Democrats having marginal control in both the House and Senate, Dynan echoed a consensus point of view that isn’t too concerned about a possible compromise.
The Treasury Department declined to comment for this story, but referred CNBC to a recent letter from Secretary Janet Yellen to House Speaker Nancy Pelosi, D-Calif.
In it, Yellen made Pelosi understand that trillions of dollars in federal spending and Covid relief laws have made it harder to say how long the Treasury will be able to maintain its extraordinary measures.
“The period of time during which extraordinary measures may last is subject to considerable uncertainty due to a variety of factors, including the challenges of forecasting U.S. government payments and revenues in the coming months, exacerbated by the increased uncertainty. in payments and receipts linked to the economic impact of the pandemic, ”the Secretary of the Treasury wrote.
The extraordinary measures allow the Treasury to buy back some investments in federal retirement programs and stop new ones in order to generate liquidity without increasing the overall debt. But when these methods are exhausted, there is no backstop.
Unless the government issues new treasury bills, payments for social security, medicare, military spending, interest on US debt, and other obligations simply stop.
Lindsey Piegza, chief economist at Stifel, noted that the extraordinary measures are neither new nor alarming immediately.
“We’ve already put extraordinary measures in place, so procedurally that’s not really a problem,” she told CNBC last week.
“However, the implication is yet another confrontation in Washington that erodes the confidence of the average American in a cohesive and functioning government,” she added. “It also highlights the ongoing infighting between policymakers, which will make it harder for the two sides to come together on everything from spending to infrastructure to the debt ceiling.”
While economists may be optimistic about a possible suspension, the math is much more complicated in Washington.
The White House has practically washed its hands of the debt ceiling quagmire.
“It is the responsibility of Congress to raise or suspend the debt ceiling in order to pay for spending that it has already authorized over the years,” said a White House official who requested anonymity to discuss an ongoing negotiation.
In Congress, few politicians, Democrats or Republicans, want to be portrayed as carrying ever-increasing federal debt 15 months before an election, even though government spending is otherwise popular.
To complicate matters this year, members of Congress from both parties are eager to find a compromise on a trillion-dollar infrastructure deal.
On top of that, Democrats plan to pass a party-specific $ 3.5 trillion domestic spending bill later this year.
Pelosi must not only muster enough votes to pass a debt ceiling suspension or raise, but also protect its razor thin majority.
A collaborator with the Democratic House leadership told CNBC that discussions over the cap are ongoing and the party’s main lawmakers will not risk the full trust and credit of the United States.
The aide did not specify which path Congress will pursue.