The Treasury Department will begin implementing contingency cash-holding measures on Monday to prevent the federal credit limit from being exceeded after a two-year debt ceiling suspension in late July.
Economists say these so-called extraordinary measures will allow the Treasury Department to pay the government’s bills for two to three months with no new debt. Thereafter, Congress must either increase or suspend the credit limit or risk the US failing to meet its obligations.
The limit, a facet of American politics for over a century, prevents the Treasury Department from issuing new bonds to fund government activities once a certain level of debt is reached. That level reached $ 22 trillion in August 2019 and was suspended until Saturday.
The new debt limit will include Washington’s additional borrowing since summer 2019. The Congressional Budget Office estimated in July that the new cap is likely to be just over $ 28.5 trillion.
Although the federal government has never defaulted, economists say such an event would have a catastrophic impact on the US economy by driving interest rates high.
“The government needs funds to pay interest on its debts, for example, and if it stops paying interest it could be extremely worrying for the financial markets,” Harvard University professor of economics Karen Dynan told CNBC on Thursday.
These funds will be used to pay government employees and send out social security checks, said Dynan, a finance officer under the Obama administration. “People depend on this money and could go through a lot of hardship if they don’t get it as planned.”
Still, the almost certain economic disaster has not stopped politicians over the years from using the debt ceiling as political football.
During the Obama administration, Republicans often used the specter of default as leverage to win spending cuts and other political priorities from the White House in return for voting to raise the debt ceiling.
But since the Democrats have marginal control in both the House and Senate, Dynan reiterated a consensus view that is not too concerned about an eventual compromise.
The Treasury Department declined to comment on the story, but referred CNBC to a recent letter from Secretary of State Janet Yellen to House Speaker Nancy Pelosi, D-Calif.
In it, Yellen Pelosi impressed that trillions in federal spending and Covid relief laws have made it harder to say how long the Treasury Department can maintain its exceptional measures.
“The period that extraordinary measures may last is subject to significant uncertainty due to a variety of factors, including the challenges of forecasting payments and revenues for the US government months into the future, exacerbated by the increased uncertainty surrounding payments and revenues in Regarding payments and revenues on the economic impact of the pandemic, “wrote the finance minister.
The extraordinary measures allow the Treasury Department to repay certain investments in federal pension programs and stop new ones to generate cash without adding to overall debt. But when these methods are exhausted, there is no backstop.
Unless the government issues new government bonds, payments for Social Security, Medicare, military spending, interest on US debt, and other obligations will simply be suspended.
Lindsey Piegza, chief economist at Stifel, stated that extraordinary measures were neither new nor cause immediate concern.
“We have already implemented extraordinary measures, so this is not a huge problem from a procedural point of view,” she told CNBC last week.
“However, the implication is yet another showdown in Washington that is undermining the average American’s confidence in a cohesive, functioning government,” she added. “It also highlights the ongoing disputes between political officials that will make it difficult for both sides to come together on everything from spending to infrastructure to the debt ceiling.”
While economists may be optimistic about a possible suspension, the calculation in Washington is far more complicated.
The White House has as good as washed its hands off the debt-covering morass.
“It is the responsibility of Congress to raise or suspend the debt limit in order to pay for the expenses it has already approved over the years,” said a White House official, who spoke on condition of anonymity to order ongoing negotiations to speak.
In Congress, few politicians, Democrats or Republicans, want to be seen as proponents of increasing public debt 15 months before an election, even if government spending is otherwise popular.
To make matters worse this year is the fact that congressmen from both parties are eager to find a compromise on a trillion dollar infrastructure deal.
In addition, the Democrats plan to pass a US $ 3.5 trillion domestic spending bill later this year by party lines.
Pelosi not only has to raise enough votes to pass a debt brake or an increase, but also to protect its wafer-thin majority.
An adviser to the Democratic leadership of the House of Representatives told CNBC that discussions about the cap continue and that the party’s top lawmakers will not risk the full faith and creditworthiness of the United States.
The adviser did not say which route Congress will take.