What to know after the US hits its debt ceiling

The United States hit the debt ceiling – the total amount of money the federal government can legally borrow Thursday While lawmakers continued to quarrel over negotiations to raise the ceiling. The Treasury is now publishing what it calls “extraordinary measures” to make sure the country can continue to pay its bills.

Although the “extraordinary measures” Worrying as it may sound, economists say the Treasury has a history of being used up, and these changes shouldn’t affect Americans’ lives right away. They essentially act as accounting tools that temporarily allow the government to continue funding its normal operations and help buy Congress more time to reach a deal.

in Message to congressional leadershipTreasury Secretary Janet Yellen said the Treasury Department began using some of its unusual measures after the current $31.4 trillion debt limit was expected to be breached on Thursday, but said the amount of time the measures would last was subject to “significant uncertainty.” . “

Although this means that the country will be able to avoid defaulting on its debt for the time being, if this finally happens for the first time, the consequences will be dire. Not only would that be bad for Americans who rely on government benefits like Social Security checks, but it would also create chaos in the stock market and hurt the broader economy.

Americans should not be immediately swayed by ‘extraordinary measures’

Extraordinary measures are essentially accounting maneuvers. For example, the Treasury Department will pause investments in certain government funds and then bring them back once the debt limit is raised or suspended.

Rachel Snyderman, senior business and associate director, said that by suspending investments in some funds, the Treasury is temporarily reducing the amount of debt held by these funds, which will allow the government to stay under the borrowing cap and continue standard operations for a longer period. Economic policy at the center of partisan politics.

Yellen said in her letter that the “debt issuance suspension period” will begin Thursday and run through June 5. The Treasury Department will begin recovering existing and new pending investments in the Civil Service Retirement and Disability Fund, which provides benefits to government employees, and suspend investments in the Health Benefits Fund for Postal Service retirees.

in e-mail Last week, Yellen said she also expected the Treasury Department to begin putting reinvestment on hold Government Securities Investment Fund of the savings plan in the federal employee retirement system this month.

Other possible options include Suspension of the daily reinvestment of securities owned by the Stock Exchange Stabilization Fund, which is used to buy or sell foreign currency, or suspend the issuance of local government securities and chain securities. Yellen said Treasury funds and measures are unlikely to be exhausted before early June.

Synderman said the measures were a “temporary fix” that Americans should not notice right away. For example, she said, the Treasury will not “indulge the hard-won savings of federal employees” by implementing the measures, and the Treasury will ultimately return the money and any interest that might otherwise have been earned.

According to the Treasury Department, civil service benefit payments, health benefit payments for postal retirees, and payments from the retirement fund for federal employees will continue to do As long as the country has not exhausted its extraordinary measures. Once a deal is reached on the debt limit, the funds will be “full” and the beneficiaries will not be affected.

Treasury secretaries have a history of enforcing these measures in recent years, Snyderman said, regardless of which political party controls the White House or whichever house of Congress. The Treasury Department last implemented these measures in August 2021 before lawmakers eventually raised the debt limit. They were also used in March 2019, December 2017, and March 2017, according to A timeline compiled by the Bipartisan Policy Center. These measures were first used in September 1985 and officially authorized in October 1986.

But Snyderman said the Treasury Department cannot rely on these measures indefinitely as the funds can be fully withdrawn from the investment. When the box drops to zero, the scale is off It can no longer be used to extend borrowing capacity.

“Once the extraordinary measures begin, the average American will not see any change overnight,” Snyderman said. “The extraordinary measures indicate that the clock is ticking and as time progresses, we will see changes in the economy.”

The government is limited in what it can do next

If extraordinary measures are exhausted and the Treasury runs out of cash, economists say there is little the federal government can do to pay all of its obligations on time until lawmakers reach an agreement.

The United States faces “the highest probability of some type of default in decades,” said Michael Strain, director of economic policy studies at the conservative American Enterprise Institute.

If the state gets to a point where it can’t pay all of its bills, Strain said the Treasury Department might try to prioritize some liabilities. For example, Treasury officials could choose to first pay all bondholders who have federal debt, then military salaries and Social Security benefits, but then decide they don’t have enough money to cover the bills incurred by the National Park Service, Strain said. . The Treasury hasn’t had to prioritize certain payments over others before, however, and it’s not clear if that would be successful or face legal challenges.

“There are real questions about whether or not it will work,” Strain said.

Some have also raised the prospects of the Treasury secretary Minting a trillion dollar coin, depositing it into a Treasury account at the Federal Reserve, and then using that money to keep the government running until the debt limit is raised, though economists say this is unlikely. Congress has made it clear that it wants to control the debt ceiling, and the Treasury Department probably won’t try to subvert that clearly, said Wendy Edelberg, director of the Hamilton Project and senior fellow in economic studies at the Brookings Institution.

Edelberg said the Fed may also try to stabilize financial markets and boost the economy by buying Treasury bonds if a country defaults on its debt. But she said the central bank may also be cautious about exacerbating inflation, which remains alarmingly high. Fed was He raised interest rates aggressively for months To control rapid price increases.

“In a different environment, you would think the Fed might flood the market with money in order to offset the negative effects of that,” said Edelberg. “But it must be careful not to do it in a way that fuels inflation.”

Although a default could have catastrophic effects on the economy, Edelberg said she’s not entirely confident that lawmakers will reach a decision on a debt limit soon.

“It’s irresponsible,” said Edelberg. “It would be quite a self-inflicted wound.”

Update on Jan. 19 at 11:20 a.m.: This story has been updated to include the US hitting the debt ceiling Thursday morning and Treasury Secretary Janet Yellen’s reaction.

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