WASHINGTON (AP) — The countdown toward a possible U.S. government default is in the offing — with frictions between President Joe Biden and House Republicans raising alarms about whether the U.S. can sidestep a potential economic crisis.
The Treasury Department projects that the federal government will on Thursday reach its legal borrowing capacity of $38.381 trillion, an artificially imposed cap that lawmakers have increased roughly 80 times since the 1960s. Markets so far remain calm, as the government can temporarily rely on accounting tweaks to stay open, meaning that any threats to the economy are several months away. Even many worried analysts assume there will be a deal.
But this particular moment seems more fraught than past brushes with the debt limit because of the broad differences between Biden and new House Speaker Kevin McCarthy, who presides over a restive Republican caucus.
Those differences increase the risk that the government could default on its obligations for political reasons, a problem that could rattle financial markets and — if not resolved — plunge the world's largest economy into a wholly preventable recession.
The pair have several months to forge a deal, as the Treasury Department imposes “extraordinary measures” to keep the government operating until at least June. But years of intensifying partisan hostility have led to a conflicting set of demands that jeopardize the ability of the U.S. lawmakers to work together on a basic duty.
Biden insists on a clean increase to the debt limit so that existing financial commitments can be sustained, refusing to even start talks with Republicans. McCarthy is calling for negotiations that he believes will lead to spending cuts. It's unclear how much he wants to trim and if his fellow Republicans would support any deal after a testy start to the new Congress that required 15 rounds of voting to elect McCarthy speaker.
Asked twice Wednesday if there was evidence that House Republicans can ensure that the government will avert a default, White House press secretary Karine Jean-Pierre said it's their “constitutional responsibility” to protect the full faith and credit of the United States. She did not say whether the White House saw signs at this stage that a default was off the table.
“We're just not going to negotiate that,” Jean-Pierre said. “They should feel the responsibility.”
For his part, McCarthy said Biden needs to recognize the political realities that come with a divided government. He equates the debt ceiling to a credit card limit and calls for a level of fiscal restraint that did not occur under President Donald Trump, a Republican who in 2019 signed a bipartisan suspension of the debt ceiling.
“Why create a crisis over this?" McCarthy said this week. "I mean, we’ve got a Republican House, a Democratic Senate. We’ve got the president there. I think it’s arrogance to say, ‘Oh, we’re not going to negotiate about pretty much anything’ and especially when it comes to funding.”
Any deal would also need to pass the Democratic Senate. Many Democratic lawmakers are skeptical about the ability to work with Republicans aligned with the “Make America Great Again” movement started by Trump. The MAGA movement has claimed that the 2020 election lost by Trump was rigged, a falsehood that contributed to the Jan. 6, 2021, insurrection at the U.S. Capitol.
“There should be no political brinkmanship with the debt limit,” said Senate Majority Leader Chuck Schumer, D-N.Y. “It’s reckless for Speaker McCarthy and MAGA Republicans to try and use the full faith and credit of the United States as a political bargaining chip.”
In order to keep the government open, the Treasury Department on Thursday was introducing a series of accounting maneuvers known as “extraordinary measures.” These measures put a hold on contributions and investment redemptions for government workers' retirement and health care funds, giving the government enough financial space to handle its day-to-day expenses until roughly June.
What happens if these measures are exhausted without a deal to raise the debt limit is unknown. A prolonged default could be devastating, with crashing markets and panic-driven layoffs if confidence evaporated in a cornerstone of the global economy, the U.S. Treasury note.
Analysts at Bank of America cautioned in a Friday report that “there is a high degree of uncertainty about the speed and magnitude of the damage the U.S. economy would incur.” The underlying challenge is that the government would have to balance its books on a daily basis if it lacks the ability to issue debt. If the government cannot issue debt, it would have to impose cuts equal in size on an annual basis to 5% of the total U.S. economy. But the analysts say their baseline case is that the U.S. avoids default.
Still, if past debt ceiling showdowns such as the one that occurred in 2011 are any guide, Washington may be in a nervous state of suspended animation with little progress until the “X-date,” the deadline when extraordinary measures are depleted. That creates its own set of challenges.
“A deal probably won’t be reached until the last minute, raising the risk that the deadline to lift the ceiling is inadvertently missed,” said Andrew Hunter, senior U.S. economist at Capital Economics.
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WASHINGTON (AP) — On the brink of hitting the nation's legal borrowing limit on Thursday, the government is resorting to “extraordinary measures” to avoid a default.
Sounds ominous, right?
But -- take a breath -- the phrase technically refers to a bunch of accounting workarounds. Yes, accounting.
Because the debt cap limits the issuance of government bonds — a way the U.S. borrows money — these workarounds shift money among accounts and should keep the government open through at least June, according to a letter last week by Treasury Secretary Janet Yellen.
In theory, President Joe Biden and Congress are supposed to use that additional time to work out an agreement to raise the nation's legal $31.38 trillion debt ceiling. These talks often grow heated and go down to the wire, with major economic damage in the balance. But there have been roughly 80 deals to raise or suspend the borrowing cap since the 1960s.
What could be worrisome is not the existence of extraordinary measures, but what happens if they are exhausted this summer without a deal in place. Economists have warned that could lead to a global financial crisis.
So far, House Speaker Kevin McCarthy and Biden are playing what could be a dangerous game of chicken with the world’s largest economy in the middle.
Some questions and answers on the situation:
WHAT ARE “EXTRAORDINARY MEASURES”?
Yellen’s Friday letter listed two measures that will begin this month in order to prevent the government from defaulting.
First, the government will temporarily suspend payments to the retirement, disability and health benefit funds for federal employees. Second, it will suspend the reinvestment of maturing government bonds in the retirement savings accounts of government workers.
By suspending the payments, the government can reduce the amount of outstanding debt. That enables the Treasury Department to keep financing government operations, according to Yellen’s letter.
WHAT ALLOWS TREASURY TO USE THESE MEASURES?
No dispute there. Congress has given Treasury the authority to do so.
Because these are retirement accounts, no one is harmed by the government equivalent of an IOU. The funds are made whole after a debt ceiling increase or suspension becomes law. It’s not necessarily the measures that can harm the economy but rather the doubts among consumers and businesses about whether lawmakers will increase the borrowing cap.
HOW BIG ARE THESE RETIREMENT FUNDS?
There were $986 billion in net assets of the civil service and federal employees retirement funds at he end of fiscal 2021, according to a report by the Office of Personnel Management. The required government contributions to the funds are large enough to rely on these extraordinary measures for roughly five months.
HOW COMMON IS THIS?
“Treasury Secretaries in every Administration over recent decades have used these extraordinary measures when necessary,” Yellen wrote in her letter.
The measures were first deployed in 1985 and have been used at least 16 times since then, according to the Committee for a Responsible Federal Budget, a fiscal watchdog.
WHY DO WE HAVE A DEBT LIMIT?
Before World War I, Congress needed to approve each bond issuance. The debt limit was created as a workaround to finance the war effort without needing a constant series of votes.
Since then, a tool created to make it easier for the government to function has become a source of dysfunction, stoking partisan warfare and creating economic risk as the debt has increased in size over the past 20 years.
HOW RISKY IS THE BRINKMANSHIP THIS TIME?
It looks alarming -- and it’s not clear how Biden, McCarthy and the Democratic Senate will find common ground. A default could cause millions of job losses, a deep recession that would reverberate globally and, ironically, higher interest rates that would make it harder to manage the federal debt.
McCarthy said Tuesday that talks should begin immediately on the potential spending cuts that Republicans are seeking in exchange for raising the debt limit, even though the Biden administration has equated that demand to holding the U.S. economy hostage.
“Who wants to put the nation in some type of threat at the last minute of the debt ceiling?” McCarthy said. “Nobody wants to do that. That’s why we’re asking, ’Let’s change our behavior now. Let’s sit down.”
The Biden administration wants the borrowing cap increased without any preconditions. White House press secretary Karine Jean-Pierre on Tuesday ruled out holding talks with McCarthy.
DO DEBT LIMIT SHOWDOWNS HELP REDUCE GOVERNMENT DEBT?
Not so much.
The Congressional Budget Office estimates that annual budget deficits will grow from roughly $1 trillion to more than $2 trillion over the next 10 years.
The imbalance over the coming years increasingly reflects government expenses for programs such as Medicare and Social Security that are outstripping tax revenue. That suggests the government would need severe cuts to spending, major tax hikes or some combination of those options.
In 2011 when Barack Obama was president and Biden was vice president, there was a bipartisan deal to raise the debt limit by $900 billion in return for $917 billion worth of automatic spending cuts over 10 years.
But the debt reduction never fully materialized.
After Donald Trump became president in 2017, Republican lawmakers fueled further debt increases by passing deficit-financed tax cuts. Debt accelerated even more with the start of the coronavirus pandemic in 2020, which caused massive government borrowing in order to pull the U.S. out of a deep recession.
The CBO last year estimated that the U.S. debt would exceed $40 trillion in 2032.