Economy in Shambles: US Begins ‘Extraordinary Measures’ to Avoid Debt Default

Treasury Secretary Janet Yellen wrote to Congress saying that the US Treasury had started its “debt issuance suspension period” amid a standoff in Congress over increasing the country’s debt ceiling.

The US Treasury said on Thursday that it had begun taking measures to prevent a default on government debt as the country hits its borrowing limit.

Congress is gridlocked over raising this debt ceiling; the issue has been a fairly frequent feature of US politics in recent years.

“I respectfully urge Congress to act promptly to protect the full faith and credit of the United States,” Treasury Secretary Janet Yellen wrote in a letter to Congressional leadership, in announcing the start of “extraordinary measures” to prevent at least a technical debt default.

The Treasury has warned Congress that the tools it’s employing to put a stop to new borrowing will only help for a limited time — likely not longer than six months. In Yellen’s letter on Thursday, she cited June 5 as the likely cutoff date at present.

If past instances are anything to go by, politicians breaking the deadlock before this date might prove the more likely way out of the impasse.

Yellen Had Already Warned of Risk of ‘Irreparable Harm’

Yellen said that because of the “debt issuance suspension,” the Treasury Department would be unable to fully invest a portion of the Civil Service Retirement and Disability Fund, among other impacts.

Yellen had written another appeal last week, warning that “failure to meet the government’s obligations would cause irreparable harm to the US economy, the livelihoods of all Americans, and global financial stability.”

Opposition Republicans have so far refused to authorize the annual approval of continued government borrowing for 2023. Although this authorization is considered almost automatic, the US has faced similar standoffs in the past, most notably during the period of Barack Obama’s two terms when the Democrats did not control both houses of Congress.

The Republicans are in the majority in the House of Representatives, while the Democrats only just retained their grip on the Senate in November 2022’s midterm elections.

Biden and House Speaker McCarthy in Focus

The onus to find a solution will likely fall primarily on two men: President Joe Biden and Republican Congressman Kevin McCarthy, the new House Speaker in the House of Representatives. Currently, their positions appear irreconcilable.

Republicans in the House are demanding negotiations on agreeing to spending cuts. It’s unclear how much McCarthy would like to trim in these talks. It’s not even clear, should he achieve his goals, whether he could convince Republican lawmakers to support some kind of deal. The 15 rounds of voting required to secure his position as House Speaker demonstrated the degree of inner-party dissent among Republicans at present.

Biden, meanwhile, has insisted on a “clean” increase to the debt limit so far, saying he’s not willing to hold talks with Republicans. Reductions in borrowing or spending could have a severe impact on his latest landmark spending and investment policy known as the Inflation Reduction Act.

On Wednesday, White House press secretary Karine Jean-Pierre said it was Republicans’ “constitutional responsibility” to protect the full faith and credit of the US, even when in opposition.

“We’re just not going to negotiate that,” Jean-Pierre said. “They should feel the responsibility.”

McCarthy, meanwhile, argues that it’s irresponsible of Biden to expect to be able to raise the debt ceiling without consultation when not in control of Congress.

“Why create a crisis over this?” McCarthy asked last 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.”

How large is the US sovereign debt burden?

The debt limit is currently set at $31.4 trillion (roughly €29,000,000,000,000), more than the country’s annual GDP, which stood in the region of $23 trillion in 2021, the last full year with available data.

Like most national governments around the world, US borrowing levels rose substantially during the COVID pandemic — and also in the decade following the 2008 financial crisis. At the end of 2019, US debt had stood at roughly $23 trillion. At the end of 2007, it was around $9 trillion.

By comparison, Germany’s national debt of roughly €2.5 trillion is a little less than the annual GDP, but it too has been rising rapidly as a share of GDP in the last couple of years.