Treasury Secretary Janet Yellen announced to Congress on Friday that the US will achieve that Statutory credit limit Next Thursday.
After that, the Treasury Department “will begin to take some extraordinary steps to prevent the United States from defaulting on its obligations,” Yellen wrote in a letter to House Speaker Kevin McCarthy, R-Calif.
The Treasury is “not currently able” to estimate how long those emergency measures will allow it to pay U.S. government obligations, he wrote, adding that it is “unlikely that the money and extraordinary measures will run out by early June.”
“It is critical that Congress act in a timely manner to increase or suspend the debt ceiling,” Yellen said.
“The government’s failure to meet its obligations will cause irreparable harm to the U.S. economy, the livelihoods of all Americans, and global financial stability,” Yellen warned.
“I respectfully urge Congress to act immediately to preserve the full faith and goodwill of the United States.”
Yellen’s letter effectively starts the clock on how long the Fed can continue to pay interest on its debt.
Congress last month raised the federal debt ceiling to about $31.4 trillion. Yellen noted that the total amount of money “the U.S. government is legally allowed to pay for its current obligations,” including Social Security and Medicare benefits, military pay, interest on the national debt, tax refunds and other payments.
The Treasury secretary’s so-called extraordinary measures could technically free up billions of dollars earmarked for other purposes but not yet spent.
That could extend the clock for weeks or months while Congress rolls out a bill to raise the debt ceiling.
A senior White House official told CNBC that the White House plans to cut a deal with Congress to raise the federal debt ceiling after the mid-April deadline for income tax filings. The official said the White House will not have enough details to negotiate a deal until it sees the level of income tax receipts.
But the debate over raising the debt ceiling is expected to be especially fraught this year in light of the new Republican majority in the House of Representatives.
McCarthy has made little secret of the fact that Republicans are demanding massive spending cuts in the federal budget in exchange for agreeing to raise the debt ceiling.
The new House Majority Leader, Rep. Rep. Steve Scalise, R-La., earlier this week compared the U.S. borrowing limit to a home equity credit card and said the nation needs to limit its spending the same way anyone with maxed-out credit cards does.
“At the same time you’re dealing with the credit limit, you’re also putting in place mechanisms so you don’t raise it,” Scalise told reporters on Capitol Hill, “because if the limit is raised, you don’t go to the store the next day and raise it again.”
“You start figuring out how to control the cost problem. It’s been going on for a long time. We’re going to face it,” he said.
What Republicans fail to mention, however, is that unlike a family defaulting on its debt, a US government default can have massive consequences around the world.
Moody’s Analytics, a research firm, warned in a September 2021 report that a default on Treasury bonds could plunge the US economy into a recession-like recession.
At the time, Moody’s predicted a 4% decline in GDP and almost 6 million job losses if the US defaulted.
In a letter to McCarthy on Friday, Yellen wrote, “In fact, in the past, even threats that the US government might default on its obligations have caused real harm, including the only downgrade in our nation’s history in 2011.”
Yellen added, “Raising or suspending the debt limit does not authorize new spending obligations or spend taxpayer money. It allows the government to fund legislative obligations that Congress and leaders of both parties have made in the past.”
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