The battlelines have been drawn in the US House of Representatives with Democrats and Republicans preparing their pitch for the biggest fiscal fight of the new year on raising the federal debt limit, which is set to cross $31 trillion by January 19.
The US debt limit is defined as the money in total the government is allowed to borrow from the Federal Eeserve. First created in 1918 and originally set at $11.5 billion, was raised to $45 billion under the aggregate debt limit act enacted by the government in 1939.
Treasury Secretary Janet Yellen had, in a letter a couple of days ago to the Congress, warned that the debt ceiling was about to be breached on January 19 and if it was not raised, it would cause serious repercussions in payouts to government departments, senior citizens and other welfare programmes.
The Republicans perceive the raising of the debt limit as reckless spending by the Joe Biden government that could drain the treasury and Democrats feel if not raised it could cause a national crisis or a financial catastrophe that could cause ripples in global financial markets.
The Washington Examiner, in a special report, said that currently, the borrowing limit, also referred to as the debt ceiling, is $31.4 trillion. It was last increased to that level some two years ago.
Of this, about $24.5 trillion is debt held by the public, and nearly $7 trillion is intra-governmental holdings, which are mostly debt held in trust funds, such as those for Social Security, it said.
Federal debt as a percentage of the national GDP is a whopping 120 per cent. It crossed 100 per cent of GDP in 2014, far above that level in the aftermath of World War II.
Lawmakers raised by nearly 100 times the debt ceiling limit since it was enacted in order to prevent the US from defaulting.
While the Democrats are pushing for Congress to raise it once again this year, House Republicans, though now in the majority, are hoping to exact concessions from President Biden in exchange for voting to increase the ceiling, media reports said.
How can a debt limit translate into a government shutdown? The threat represented by the debt ceiling is not the same as the threat of a government shutdown – it’s much more serious. The two situations are often confused by those reading the news and even by some lawmakers, reports said adding, a government shutdown occurs when Congress disagrees on funding future spending by government agencies. When the government shuts down, some workers are furloughed, and some government services go unprovided.
In the 2018-2019 government shutdown during Donald Trump’s presidency, some national parks fell into disrepair, and some craft beer makers couldn’t get labels for their products. The economic fallout was restricted, as it was on the other occasions when the government shut down.
The debt ceiling, in contrast, allows the Treasury to take out debt to pay for spending already authorised in the past. Raising the debt ceiling does not authorise new spending. Instead, it allows the Treasury to pay incoming bills – most significantly, the interest payments owed on the debt, the Examiner said.
The US government has so far not failed to meet its interest payment commitments on the debt in modern times (apart from failing to pay some smaller investors on time in 1979 because of a glitch in the system for processing payments).
When the limit is reached, the Treasury may no longer issue new debt – that is, Treasury bills, notes, and bonds. To pay the government’s incoming bills without issuing new debt, the Treasury will turn to what are called “extraordinary measures” to free up cash – essentially, shifting money around government accounts, media reports said.
The Treasury, it is learnt, can prematurely redeem Treasury bonds held in the retirement savings accounts of federal employees, suspend state and local government series securities, and halt contributions to some government pension funds. Such measures were used at least 16 times, the first time being in 1985, according to the Committee for a Responsible Federal Budget, and as recently as 2021.
Yet, the extraordinary measures will eventually run out. Yellen said they would be sufficient to carry the US through early June, a perfect scenario for a congressional showdown. At some point, the Treasury will no longer be able to guarantee that it can make all incoming payments on time and in full. That point is referred to, a bit ominously, as the “X-date”, reports said.
Bills come in big amounts to the Treasury. The Treasury might have to pay a $4 billion bill for federal salaries one day and then a $30 billion bill for Medicare and a $40 billion bill for interest on the debt the next business day. The Treasury might also get tax payments. But at some point, it may not have enough cash on hand to pay a bill in full, the reports said.
Theoretically, the Treasury would have to decide either to make part of the payments in full and skip others or make payments as they come up and delay subsequent payments. Some of these options are going to be a tough call.
Withholding Social Security checks from disabled recipients, and others would be unthinkable, such as defaulting on an interest payment on the debt. In any scenario, it is thought that the Treasury should prioritise interest payments on the debt, as Treasury securities underpin the global financial system, it has warned.
Treasury Secretaries of both parties have in the past said that there was no solution for prioritising payments – because doing that is not feasible. Still, congressional Republicans have in the past drawn up legislation to prioritize certain payments if the debt ceiling isn’t lifted.
If the US defaulted on the debt, it would have catastrophic effects on the economy. Casting doubt on payments on Treasury securities, viewed globally as a risk-free asset, could send interest rates soaring and have profound knock-on effects for nearly all financial instruments, the Treasury pointed out in arguing for raising the debt ceiling limit to make the payouts.
“Stock prices would be cut almost in one-third at the worst of the sell-off, wiping out $15 trillion in household wealth. Treasury yields, mortgage rates, and other consumer and corporate borrowing rates spike, at least until the debt limit is resolved and Treasury payments resume. Even then, rates never fall back to where they were previously,” said Mark Zandi, Moody’s Chief Economist.
What are the two sides saying? So far, Republicans have made it clear that they want to use the moment to work on reducing federal spending and debt. House Speaker Kevin McCarthy said on Sunday that he is willing to work with President Biden and congressional Democrats on a deal to cap government spending and side-step a default, although details of exact numbers and demands are still not clear. “I want to sit down with him now so there is no problem,” he said on Fox News.
House Minority Leader Hakeem Jeffries has accused Republicans of putting the country in a dangerous position over the debt limit showdown. In a recent interview with NY1, he warned of global economic fallout. “In our country’s history, which is about 247 years old, the US has never defaulted on our debt. And if we were to do so, because of extremist Republicans in the House, that will have grave consequences for Social Security, for Medicare, for the economy and the, in fact, not just for the country but for the world,” he said.