The countdown is on and the end is near. If the US Congress does not take action this month, the consequences for the economy could be catastrophic, in the words of Treasury Secretary Janet Yellen. Yellen has sent a letter on Monday to the Republican and Democratic leaders of the House of Representatives urging them to approve or suspend the debt ceiling. If they don’t, the federal government could run out of money to meet its obligations as early as June 1.
The political battle is served. The Republicans, who have a majority in the House of Representatives, want to impose cuts on the Joe Biden government in exchange for increasing the debt ceiling, but without bearing the unpopularity of saying which ones. In addition, they demand that Biden repeal some of the measures of the star of his mid-term. They have passed a bill to that effect, though it has no future in the Democratic-controlled Senate.
The White House also considers it blackmail and asks that the debt ceiling be raised without conditions. Biden called the congressional leaders to whom Yellen’s letter was addressed this Monday to summon them to a meeting on Tuesday of next week, May 9, at the White House. They are Kavin McCarthy, Speaker of the House of Representatives; Hakeen Jeffries, Democratic leader in that chamber; Chuck Schummer, leader of the Democrats in the Senate, and Mitch McConnell, leader of the Republican minority in the Upper House.
Yellen explains that this estimate is based on currently available data, since federal revenues and disbursements are inherently variable, and points out that the actual date on which the Treasury exhausts the extraordinary measures could be several weeks later. “It is impossible to predict with certainty the exact date that the Treasury will not be able to pay government bills,” she adds.
The Secretary of the Treasury warns that it is necessary to take action as soon as possible: “We have learned from previous debt limit impasses that waiting until the last minute to suspend or increase the debt limit can cause serious damage to the confidence of companies and governments. consumers, raise short-term borrowing costs for taxpayers, and negatively affect America’s credit rating,” he says.
In the past, even threats that the US government might default have caused real damage, including the only downgrade in US history in 2011, when it lost AAA.
The debt limit is the total amount of money the United States Government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military wages, interest on national debt, tax refunds and other payments. It is currently set at 31.381 trillion dollars.
In an extreme case, the federal government’s inability to borrow could lead to an unprecedented debt default that would shake markets and plunge the country into recession.
Rather than default on the debt, the United States could try to implement creative solutions to avoid exceeding the limit. For example, issuing debt with a low face value but very high interest rates. With it, it could obtain more resources without exceeding the nominal value of outstanding debt. The possibility of issuing a multi-million dollar bill or coin with which to meet expenses has also been considered as a theoretical hypothesis. All these alternatives have contraindications, but not as many as the suspension of the payment of the debt.
The Treasury began taking 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 Series (SLGS) Treasury securities. SLGS are special purpose Treasury securities issued to states and municipalities to help them meet certain tax rules. When the Treasury issues SLGS, they are discounted from the debt limit. The Treasury notes that it is taking this action to manage the risks associated with the debt limit, “but it is not without costs, as it will deprive state and local governments of an important tool to manage their finances,” he says.
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