February 28, 2024

U.S. Treasury Secretary Janet Yellen says Jan.

Shawn Thew | Swimming pool | Reuters

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.

The Treasury Department notified Congress Monday afternoon to confirm that emergency measures had begun. Treasury Secretary Janet Yellen told House Speaker Nancy Pelosi, D-California that her department would stop making regular payments to a variety of pension funds.

“I will not be able to fully invest the portion of the Public Service Pension and Disability Fund (CSRDF) that is not needed immediately to pay the beneficiaries and that on Monday, September 2nd, 30th, 2021,” Yellen told dem Speaker of the House of Representatives.

“I respectfully urge Congress to protect the full faith and creditworthiness of the United States by acting as quickly as possible,” she added.

Previously, Yellen Pelosi impressed with trillions of federal spending, and the Covid relief laws made it harder to say how long the Treasury Department can maintain its exceptional measures.

Although the federal government is never insolvent, economists say that 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 financial markets,” Harvard University professor of economics Karen Dynan told CNBC on Thursday.

These funds will be used to pay government employees and mail social security checks, said Dynan, a Treasury Department official during the Obama administration. “People depend on this money and could go into 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 with the Democrats having marginal control in both the House and Senate, Dynan reiterated a consensus view not overly concerned about an eventual compromise.

The extraordinary measures allow the Treasury Department to repay certain investments in federal pension programs and stop new ones in order to generate cash without increasing 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 are ongoing 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.