The U.S. is expected to reach its borrowing limit next Thursday, causing the Treasury Department to begin deploying “extraordinary measures” that buys the federal government enough time to starve off the specter of a debt default until at least early June as Washington kicks off a contentious debt ceiling battle.
Treasury Secretary Janet Yellen warned Congressional leaders in a letter Friday that the U.S. is hitting its $31.4 trillion federal statutory debt ceiling on Thursday, January 19. While the deadline is less than a week away, the Treasury Department will begin deploying “extraordinary measures” in order to keep paying the nation’s bills and sustain the government through early June.
“Once the limit is reached, Treasury will need to start taking certain extraordinary measures to prevent the United States from defaulting on its obligations,” Yellen wrote. “It is therefore critical that Congress act in a timely manner to increase or suspend the debt limit. Failure to meet the government’s obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans, and global financial stability.”
The “extraordinary measures” will reallocate federal funding to continue paying the government’s debts by employing the suspension of reinvestment in the “Thrift Savings Plan” for federal workers, suspending new investments in the civil service retirement and disability fund, the Government Securities Investment Fund, or G Fund, part of a savings plan for federal employees. It buys the federal government time for “only a limited amount.”
Yellen urged Congress to act quickly in taking action to raise or suspend the debt ceiling in order to “protect the full faith and credit” of the United States.
The warning letter from Yellen officially kicks off the most contentious debt ceiling battle in history. The intense showdown has already put Congress and the White House at odds on how to pass a debt limit with both sides trading barbs that are expected to be an ongoing battle over the next few months.
House Speaker Kevin McCarthy (R-CA) ruled out a clean increase of the debt ceiling that President Biden is demanding Congress to simply do without discretionary spending cuts or fiscal reforms to rein in federal debt concessions attached.
“Let’s sit down and find a place that we can protect Medicare and Social Security for the future generations. Let’s put our house in order.” McCarthy said. “I’d like to sit down with all the leaders, especially with the president, and start having discussions. I think it’s a sign of arrogance, if you would say, he wouldn’t even discuss it.”
McCarthy indicated that such concessions were done previously during both the Obama and Trump administrations and is looking to mimic the 2019 Bipartisan Budget Act as the blueprint direction for negotiation talks with Democrats and moderate Republicans.
Former President Trump and former House Speaker Nancy Pelosi reached “a debt ceiling, and it was a cap agreement for two years, to cap the spending and make those decisions — this is something that people have utilized,” McCarthy stated.
But the White House is rejecting McCarthy’s offer to negotiate, while President Biden doubling down on his vow that no policy strings on any conditions will be tied in exchange for raising the debt limit.
“We believe when it comes to the debt limit, it has been done in a bipartisan way over the years and decades, and it should be done without conditions. There’s going to be no negotiation over it,” White House Press Secretary Karine Jean-Pierre told reporters during Friday’s press briefing. “This is something that must be done. It’s not and should not be a political football. This is not political gamesmanship. This should be done without conditions.”
Instead, the Biden Administration is looking to work around McCarthy and conservative Republicans, opting to court freshman Republican lawmakers while zeroing in on the few remaining moderate Republicans that returned to Congress. The White House strategy, according to a source is for Biden officials to target those who won in the district Biden carried in 2020 and those whose rhetoric is not considered “MAGA Republican.” Aides will also woo Republican lawmakers with tickets to Kennedy Center seats, visits to the White House, and potentially one-on-one time with the president on Air Force One.
Yellen also voiced opposition to any negotiation, noting the dangers of not raising the debt ceiling have “caused real harms, including the only credit rating downgrade in the history of our nation in 2011.”
The debt ceiling is the legal cap set by Congress on the amount the U.S. government can borrow to pay for its existing obligations and pay the bills it has accrued. It’s best described as the national credit card limit given to the government with a cap limit on the amount it can borrow to finance its operation. Since the legislative modifications of the aggregate debt limit were first enacted in 1917, Congress has approved 102 separate debt limit modifications.
Congress last raised the federal debt limit by $2.5 trillion to $31.381 trillion just 13 months ago back in December 2021, starving off default threats until early 2023. It includes the total amount of federal debt outstanding, about $24.5 trillion, as well as the nearly $6.9 trillion the government has borrowed from itself.
The current debt cap is nearly $31.4 trillion. If Congress fails to increase the debt ceiling, a situation that has never occurred in the 100 years since the limit was enacted, the U.S. could be forced to default which carries significant risk, including market turbulence and economically catastrophic. Even the threat of a potential default can cause an economic downturn as the last time the U.S. hit its debt ceiling and stood on the verge of defaulting was in 2011. The event rattled markets and caused a downgrade of the U.S. S&P credit rating as a result of the drawn-out debt ceiling debate. The delays in raising the debt ceiling in 2011, although avoiding default left a bruise on the economy that took months for the U.S. to recover.
The Treasury Department reported on Thursday the federal government ran an $85 billion budget deficit in December, 299% larger than the previous year’s shortfall of $21.3 billion. On top of the Biden administration’s wild out of control government spending — flushing $6.28 trillion in Fiscal Year 2022, with December alone seeing $539.9 billion being blown away, rising interest rates has ballooned the deficits even more.
Annualized interest payments on the public debt increased by $57 billion, or 37% over the same period a year before, to $210 billion. The higher rates on new debt come as the Federal Reserve ratchets up its benchmark interest rates to combat the 40-year high inflation. According to the Peterson Foundation, the jump in interest expense was larger than the biggest increase in interest costs in any single fiscal year, dating back to 1962.
With the Fed funds rate target currently between 4.25% and 4.50%, which has exploded over the past several months, every increase in interest rate expands the federal government’s interest expense causing more spending added to the national debt. In Fiscal Year 2022, the U.S Treasury has forked out $475 billion just to fund the government’s interest payments. That was up about 30% from last year. Interest expense ranks as the sixth largest budget expense category, almost $250 billion below Medicare.
To avert future reckoning on the national debt, many economists believe that Congress should begin taking steps to reduce the deficit and get spending under control at the same time the Federal Reserve pushes to raise interest rates in their inflation battle. More government debt equates to less economic growth and interest expenses adding to the nation skyrocketing debt and climbing rapidly into the top three federal expenses. The real danger of the debt growing into an uncontrollable level without drastic changes, the U.S. could barrel towards future economic reckoning.CongressDebt CeilingDebt LimitFederal ReserveJanet YellenPresident BidenSpeaker Kevin McCarthyTreasury DepartmentWhite House