In January, the U.S. government ran up against its legal borrowing limit of $31.381 trillion, and the Treasury Department began implementing “extraordinary measures” to avoid missing payments on its bills.
That started speculation about the “X-date” — the date when those measures would be exhausted and the government might actually default if the limit on federal borrowing is not lifted. The X-date could be reached as early as June, depending on how much money the IRS collects in April from people filing their taxes.
How big of a problem is this?
This might be the time to be getting a bit worried as more than three months have passed with little progress. There is only so long these accounting workarounds can last before President Biden and House Speaker Kevin McCarthy need to reach a deal to lift the debt cap. McCarthy is calling for trillions of dollars in spending cuts over the decade in return for an increase, while Biden insists that any talks about government finances should not occur with the threat of an economy-wrecking default hanging over lawmakers.
The Democratic president and Republican congressional leader have each tried to assure the public in recent weeks that they don’t want the government of the world’s largest economy to default. But Biden has resisted McCarthy’s calls for negotiations, while McCarthy is pushing a plan that can’t pass the Democratic-majority Senate.
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 possibly makes this time different is the degree of political polarization, which could possibly lead to the U.S. government missing payments and triggering a global economic meltdown.
To keep the government open, the Treasury Department in January began a series of accounting maneuvers that would put a hold on contributions and investment redemptions for government workers’ retirement and healthcare funds, giving the government enough financial space to handle its day-to-day expenses until roughly June.
By suspending payments, the government can reduce the amount of outstanding debt, enabling the Treasury to keep financing government operations.
What happens if these “extraordinary measures” are exhausted without a debt limit deal 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.
How common is this?
“Treasury Secretaries in every Administration over recent decades have used these extraordinary measures when necessary,” Treasury Secretary Janet Yellen wrote in her initial letter about the measures.
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 brinksmanship this time?
It looks alarming — and it’s unclear 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.
On Fox News, McCarthy defended his plan in a Sunday interview by noting that even Sen. Joe Manchin (D-W.V.), backed a 1% spending cap on discretionary spending. McCarthy said Biden was putting the country at risk of defaulting by refusing to hold talks.
“The idea that he won’t even negotiate for more than 80 days, he is now putting the country in default,” McCarthy said. “We are the only ones being responsible and sensible about this.”
Biden called the plan that McCarthy unveiled last week “wacko,” with a White House analysis showing that the spending caps would hurt schooling for children, healthcare for veterans, food aid for families and seniors and cause housing costs to climb for the country’s poorest households. The president’s budget plan announced in March would reduced deficits by nearly $3 trillion over the next 10 years, primarily through tax increases on the wealth and corporations.
“America is not a deadbeat nation,” Biden said. “Take default off the table.”
