The US government has hit the ceiling on its debt, brushing up against its legal limit of $38.381tn and piling pressure on Congress to approve an increase to avoid a debt default in the coming months that would send a shock wave through the global economy.
In a letter to congressional leaders, the treasury secretary, Janet Yellen, said it would begin taking “extraordinary measures” to make the government’s cash on hand last until Congress acts. These include a “debt issuance suspension period” lasting from today until 5 June, as well as suspending investments into two government employee retirement funds.
“As I stated in my January 13 letter, the period of time that extraordinary measures may last is subject to considerable uncertainty, including the challenges of forecasting the payments and receipts of the US government months into the future. I respectfully urge Congress to act promptly to protect the full faith and credit of the United States,” Yellen wrote.
The countdown toward a possible US government default puts the spotlight on frictions between President Joe Biden and House Republicans, raising alarms about whether the US can sidestep a potential economic crisis.
An artificially imposed cap, the debt ceiling has been increased roughly 80 times since the 1960s. The government can temporarily rely on accounting tweaks to stay open. Any major threats to the economy would be several months away.
But with the House speaker, Kevin McCarthy, presiding over a restive Republican caucus, there are concerns that the government could default on its obligations for political reasons.
Biden insists on a “clean” increase to the debt limit so that existing financial commitments can be sustained and is refusing to even start talks with Republicans. McCarthy is calling for negotiations that he believes will lead to spending cuts. It’s unclear whether enough fellow Republicans would support any deal after a testy start to the new Congress that required 15 rounds of voting to elect McCarthy as speaker.
The White House press secretary, Karine Jean-Pierre, said it was the “constitutional responsibility” of Congress to protect the full faith and credit of the United States.
McCarthy said Biden needs to recognize the political realities that come with a divided government. The speaker has called for spending cuts of a kind that did not occur under President Donald Trump, a Republican who in 2019 signed a bipartisan suspension of the debt ceiling.
The Senate Republican leader, Mitch McConnell, said on Thursday in Louisville, Kentucky, that he was unconcerned about the situation because debt ceiling increases are “always a rather contentious effort”.
“America must never default on its debt,” McConnell said. “We’ll end up in some kind of negotiation with the administration over what are the circumstances or conditions under which the debts are going to be raised.”
Any deal would need to pass the Democratic-run Senate. “There should be no political brinkmanship with the debt limit,” said the Senate majority leader, Chuck Schumer, a Democrat from New York. “It’s reckless for Speaker McCarthy and Maga Republicans to try and use the full faith and credit of the United States as a political bargaining chip.”
In order to keep the government open, the treasury department on Thursday was making a series of accounting maneuvers that would put a hold on contributions and investment redemptions for government workers’ retirement and healthcare funds, giving the government enough financial space to handle its day-to-day expenses until roughly June.
What happens if these measures are exhausted without a debt limit deal is unknown. A prolonged default could be devastating, with crashing markets and panic-driven layoffs if confidence evaporates in a cornerstone of the global economy, the US treasury notes.
The government would have to balance its books on a daily basis if it lacks the ability to issue debt, and it would have to impose cuts equal in size on an annual basis to 5% of the total US economy.
Analysts at Bank of America cautioned in a report last week that “there is a high degree of uncertainty about the speed and magnitude of the damage the US economy would incur”.
Markets so far remain relatively calm, given that the government can temporarily rely on accounting tweaks to stay open and any threats to the economy would be several months away. Even many worried analysts assume there will be a deal.
