Last Thursday, Treasury Secretary Janet L. Yellen sent a letter to House Speaker Kevin McCarthy that the U.S. has hit its debt ceiling and the Department of the Treasury will begin taking extraordinary measures to avoid defaulting on the debt.
The debt ceiling, or debt limit, is the maximum amount the federal government can borrow to finance pre existing obligations. Since the U.S. spends far more on its programs than it brings in from taxes and various other revenue, it borrows large amounts of money to pay bills regarding things like salaries for the military, federal employee salaries, tax refunds, and many other government operations. The U.S. nearing the debt limit poses a threat to financial markets due to the Republican and Democrat clashes, and defaulting on said debt jeopardizes programs such as Medicare and social security.
Extraordinary measures are actions taken by treasury secretaries to prevent a U.S. default on its debt, and are authorized by Congress to do so. These measures typically involve changes in behind-the-scenes accounting by the Treasury Department, cutting down on costs that aren’t strictly necessary for government obligations to buy time for Congress to suspend or raise the debt limit. The limit had previously been raised to $31.4 trillion in December 2021.
Treasury Secretary Yellen has said that extraordinary measures are estimated to delay reaching the debt ceiling until June 2023, and now it is in Congress’ hands to make a decision before that deadline on how to avoid a government default. They have several options including suspending the limit temporarily until they can agree on a more permanent solution or raising the debt limit to a higher amount to avoid reaching it. These are both decisions Congress has made in the past, as recently as 2021. They could also choose to eliminate the debt limit entirely, a recommendation favored by some Democrats, arguing that the cap only stops the government from spending money that was already authorized to be spent by Congress.
Unfortunately, the current division in Congress makes it unlikely that they will be able to come to a consensus until far closer to June, if before the deadline at all, as it has been a known tactic for Republicans to try and pass sweeping spending cuts along with any plan to avoid hitting the debt ceiling. With Republicans in narrow control of the House, they are in a position to stall any possible decision for extended periods of time. House Speaker McCarthy has already said that Republicans will seek to use the debt limit debate to acquire spending cuts. President Joe Biden has also made comments, saying that Congress must raise the debt ceiling the White House will refuse to negotiate.
Sources:
https://www.nytimes.com/2023/01/11/us/politics/debt-ceiling-economy-congress.html
https://time.com/6248656/what-debt-ceiling-means-for-you/
https://www.cnn.com/2023/01/19/politics/debt-ceiling-deadline-treasury/index.html
https://www.cnn.com/2023/01/17/politics/debt-ceiling-extraordinary-measures/index.html
https://www.washingtonpost.com/business/interactive/2021/us-debt-default-payments/
5 comments:
I think it's really important that the US Treasury weight the pros and cons of temporarily suspending the debt limit or raising it. The pros of temporarily suspending the debt limit include giving Congress more time to come to a consensus on a more permanent solution and avoiding a government default. Raising the debt limit to a higher amount would also prevent a government default, but it could also lead to an increased risk of inflation and higher interest rates. Additionally, raising the debt limit to a higher amount may signal to Americans that the government is not serious about reducing its debt in the long-term. On the other hand, temporarily suspending the debt limit could be seen as a sign of fiscal irresponsibility and could lead to panic and loss of confidence in the government's ability to manage its finances. Ultimately, either option could have negative consequences for the economy if not handled carefully.
I may be misunderstanding your comment, but just to clarify either way, only Congress can suspend or raise the debt limit. All the Department of the Treasury can do is move existing finances around, delaying some programs to prioritize others. While this works temporarily, eventually they will run out of money to move around, leading to the U.S. defaulting on some of its debt, a problem that only the divided Congress can resolve as they have the power of the purse. It is undoubtedly true that any option chosen by Congress will likely have negative consequences for the U.S. economy. Regardless, the prospect of the U.S. defaulting on its debt would have a far greater effect than either suspending or raising the debt limit. Defaulting would have the potential for a recession not just within U.S. borders but across the globe as well.
According to CFR, experts estimate that a breach of the debt ceiling could lead to the loss of 3 million jobs, increase the cost of an average mortgage, and raise interest rates. Experts even insist that this could have severe consequences for global financial markets as it could lead to dollar depreciation and cause investors to sell U.S. treasury bonds. This can benefit China and other rivals by increasing the value of their currencies (Berman). Although the Department of Treasury has temporary measures to stave off default for a brief period of time, if Congress does not raise the debt limit, the government would have to reduce spending or raise taxes.
https://www.cfr.org/backgrounder/what-happens-when-us-hits-its-debt-ceiling
Eliminating the debt ceiling could certainly help to prevent the country's economic future from being jeopardized by a potential default on the U.S. government paying its bills. As Grace mentioned earlier, a default would be financially catastrophic for the U.S. economy and even the world's economy as a whole (as much of the world's trade is denominated in U.S. dollars). However, the debt ceiling does force a discussion about the amount of debt the U.S. has, which of course needs to eventually be repaid with interest. If the debt becomes too large, it can become a drag on the economy and even lead to a financial crisis through increased interest rates and borrowing costs (which in turn could lead to cuts in vital spending programs). We saw a situation like this play out in Greece where their debt got too large and had to greatly increase interest rates, and had to be bailed out by the European Central Bank to avoid a complete financial catastrophe. The debt ceiling highlights the United States' debt (which increased under both Democratic and Republican administrations, including a significant increase under the Trump administration) and forces the government to at least discuss fiscal responsibility (although brinkmanship on debt isn't the best way to do this).
Not to repeat what other people have been saying, but increasing the debt ceiling would most definitely give more time for lawmakers to decide what to do, but I doubt they will be able to solve the issue. One thing both parties agree on is spending, both Republicans and Democrats have pursued outrageous plans costing U.S. taxpayers money they don't have. While lawmakers extend the debt ceiling again after already increasing it in 2021, Americans politicians need prioritize the larger issues. The country will soon be unable to pay back the interest on its loans with tax payer money, leading to more distability in the world economy. America currently acts as one of the most stable markets for trade and the negative effects of the USD will be felt around the world. This could lead to interest rates increasing worldwide to all the markets which put their faith in the US and overall market slowdowns.
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