The Club PUBlication 01/23/2023

YELLEN WARNS U.S. HAS HIT DEBT CEILING
Short-term juggling might delay pain, but only the divided Congress can avert a global financial catastrophe.
By ALAN RAPPEPORT New York Times​

Treasury Secretary Janet Yellen spoke at the Bureau of Engraving and Printing in Fort Worth, Texas. President Joe Biden has noted that his administration has reduced the deficit by $350 billion. House Speaker Kevion McCarthy blames Democrats for disregarding the debt ceiling.

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Washington is gearing up for another big fight over whether to raise or suspend the nation's debt limit, with Treasury Secretary Janet Yellen telling Congress on Thursday that the United States had reached its existing borrowing cap of $31.4 trillion.

Yellen sent a letter to Congress saying the Treasury will begin using "extraordinary measures" — suspending some investments and exchanging different types of debt — to try to stay beneath the cap for as long as possible. But eventually, the United States will need to either borrow more money to pay its bills or stop making good on its financial obligations, including possibly defaulting on its debt.

Responsibility for lifting or suspending the borrowing cap falls to Congress, which must get a simple majority in both the House and Senate to vote for any change to the debt limit.

This year is shaping up to be the messiest fight in at least a decade. Republicans now control the House, and they have adopted new rules governing legislation that make it more difficult to raise the debt limit and that strengthen Republicans' ability to demand that any increase be accompanied by spending cuts. Senate Republicans have also insisted that increases to the debt limit should be tied to "structural spending reform."

President Joe Biden has said he will oppose any attempt to tie spending cuts to raising the debt ceiling, raising the likelihood of a protracted standoff.

All of this drama raises the question of what the debt limit really is, how it got here and why the United States does not do away with a debt limit entirely and spare the nation from its periodic faceoff with an economic time bomb.

What is the debt limit?
The U.S. borrows huge sums of money by selling Treasury bonds to investors across the globe and uses those funds to pay existing financial obligations, including military salaries, safety net benefits and interest on the national debt.

The debt limit is a cap on the total amount of money that the federal government is authorized to borrow to fulfill its financial obligations. Because the United States runs budget deficits — meaning it spends more than it brings in through taxes and other revenue — it must borrow huge sums of money to pay its bills. The debt ceiling debate often elicits calls by lawmakers to cut back on government spending, but lifting the debt limit does not authorize any new spending and in fact simply allows the United States to finance existing obligations.
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When was the debt limit breached?
The U.S. hit its technical debt limit Thursday, prompting the Treasury Department to begin using "extraordinary measures" to continue paying the government's obligations. Those are essentially fiscal accounting tools that curb certain government investments so that the bills continue to be paid.

Those options could be exhausted by June, Yellen told Congress last week. The Bipartisan Policy Center, which closely tracks the debt limit deadline, estimates that the Treasury will really run out of cash — what's known as the X-date — sometime around the middle of the year.

How much debt does the United States have?
The national debt crossed $31 trillion for the first time last year. The borrowing cap is set at $31.381 trillion.

What happens if the debt limit is not lifted or suspended?
Once the government exhausts its extraordinary measures and runs out of cash, it would be unable to issue new debt. That means it would not have enough money to pay its bills, including interest and other payments it owes to bondholders, salaries for troops and benefits to retirees.

No one knows exactly what would happen if the United States gets to this point, but the government could wind up defaulting on its debt if it is unable to make required payments to its bondholders. Economists and Wall Street analysts warn that such a scenario would be economically devastating and could plunge the globe into a financial crisis.

Can the government do anything to forestall disaster?
There is no official playbook for what Washington could — or would — do if the United States is unable to pay its bills. But options do exist. The Treasury could try to prioritize payments, such as paying bondholders first. Still, such an idea has yet to be tested and would require political decisions about who gets paid and who doesn't.

If the United States does default on its debt, which would rattle the markets, the Federal Reserve could theoretically step in to buy some of those Treasury bonds. That could help calm what would undoubtedly be panic in the Treasury markets and elsewhere.

Why does the United States limit its borrowing?
According to the Constitution, Congress must authorize borrowing. The debt limit was instituted in the early 20th century so the Treasury did not need to ask for permission each time it needed to issue bonds to pay bills. The first debt limit came as part of the 2nd Liberty Bond Act of 1917, according to the Congressional Research Service. A general limit on the federal debt was imposed in 1939.

Do other countries do it this way?
Denmark also has a debt limit, but it is set so high that raising it is generally not an issue. Most other countries do not. In Poland, public debt cannot exceed 60% of gross domestic product.

Why is raising the debt limit so difficult?
For many years, raising the debt ceiling was routine. But as the political environment has become more polarized, brinkmanship over the debt ceiling has increased. The House used to employ the "Gephardt Rule," which required the debt limit to be raised when a budget resolution was passed, but that was for the most part phased out during the 1990s.

During the 2011 debt-ceiling battle, some argued that then-President Barack Obama had the power to unilaterally lift the debt ceiling. Former President Bill Clinton said at the time that if he were still in office, he would invoke the 14th Amendment, which says the validity of U.S. debt shall not be questioned, raise the debt ceiling on his own and force the courts to stop him.

Obama and his lawyers disagreed and opted against that approach. After leaving office, Obama acknowledged that he and Treasury officials considered several creative contingency plans, such as minting a $1 trillion coin to pay off some of the national debt. In a 2017 interview, he described the idea as "wacky."

Would it be a good idea to do away with the debt limit?
Few lawmakers from either party enjoy a vote on the debt ceiling, and the default that would be caused by a failure to raise it would lead to an economic catastrophe. With political polarization in the United States showing no signs of abating, it often seems that the risk of an accidental default outweighs any fiscal responsibility that the debt limit encourages.
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Yellen has said she would support legislation to abolish the debt limit, but Biden has ruled that out.