US set to hit debt ceiling as Treasury Secretary Janet Yellen prepares ‘extraordinary measures’

US set to hit debt ceiling as Treasury Secretary Janet Yellen prepares ‘extraordinary measures’

The US is expected to hit the ceiling on Thursday, forcing the Treasury Department to take “extraordinary measures” to allow the government to continue paying bills while Congress negotiates to try to avoid an economic meltdown.

American debt is now a staggering $31.38 trillion — 120 percent of GDP, up from 39.2 percent in 2008 and 77.6 percent in 2018.

The staggering figure is the highest since World War II, equates to $246,876 in government debt per taxpayer, and is more than the economies of China, Japan, Germany and the UK combined.

The “extraordinary measures” set to begin on Thursday relate to accounting workarounds to ensure financial liquidity to keep the government open at least until June, according to a letter from Treasury Secretary Yellen to Spokesman Kevin McCarthy dated 13th January.

If no agreement is reached by summer, the consequences could lead to a global economic crisis. Since 1960, Congress has raised, extended, or revised the debt limit 78 times when the US has reached its borrowing limit.

By then, President Joe Biden and Congress will be negotiating to work out an agreement to raise the federal debt ceiling, which the Senate Budget Committee says collapses to $94,213 per citizen.

Republicans have said they will oppose raising the debt ceiling without cutting federal spending, while the White House and Democrats refuse to allow the GOP to cut federal programs like Social Security.

The US is expected to hit the ceiling on Thursday, forcing the Treasury Department to take “extraordinary measures” to allow the government to continue paying bills while Congress negotiates to try to avoid an economic meltdown

The federal debt ceiling was raised by $2.5 trillion in December 2021 to $31.381 trillion, which is expected to be reached on Thursday, January 18.

The federal debt ceiling was raised by $2.5 trillion in December 2021 to $31.381 trillion, which is expected to be reached on Thursday, January 18.

These nerve-wracking, indigestion-inducing talks are expected to be resolved only shortly before a potentially catastrophic economic meltdown, but since the 1960s there have been about 80 agreements to raise or suspend credit limits.

So far, House Speaker Kevin McCarthy and Biden are playing a potentially dangerous chicken game with the world’s largest economy in the middle.

The results could be devastating for both taxpayers and the global economy, so has broken down what to expect as both parties step into the ring and try to broker a détente.

WHAT ARE “EXCEPTIONAL MEASURES”?

Yellen named two measures to start this month to prevent a government default.

First, the government will temporarily suspend payments to pension, disability and health insurance funds for federal employees. Second, the reinvestment of maturing government bonds in government employees’ pension accounts will be suspended.

By suspending payments, the government can reduce the amount of outstanding debt. This allows the Treasury Department to continue funding government operations, according to Yellen’s letter.

Treasury Secretary Janet Yellen will have to resort to

Treasury Secretary Janet Yellen will have to resort to “extraordinary measures” to keep the government solvent after the US hit the debt ceiling expected on Thursday

WHAT ENABLES THE TREASURY TO DO THIS?

Congress has given the Treasury Department the authority to do so.

Since these are retirement accounts, no one is harmed by the government equivalent of a promissory note.

The funds will be complete after a debt ceiling increase or suspension becomes law. It is not necessarily the measures that can harm the economy, but the doubts of consumers and companies as to whether the legislator will increase the credit limit.

WHAT CAN $1 TRILLION BUY?

A billion here and a billion there, it adds up, but what can $1 trillion actually buy?

  • $3 latte every day for the next 900 million years
  • Australia’s GDP according to the World Bank
  • Fund the military for all 30 NATO countries
  • The combined fortunes of the nine richest people in the world, including Bernard Arnault, Elon Musk, Gautam Adani, Bill Gates, Jeff Bezos, Warren Buffett, Larry Elison, Mukesh Ambani and Steve Ballmer, according to Investopedia

HOW FREQUENT IS THIS?

“Treasury ministers of all administrations have taken these extraordinary measures when needed over the last several decades,” Yellen wrote in her letter.

The measures were first deployed in 1985 and have been applied at least 16 times since then, according to the Committee on Federal Budget Governance, a financial watchdog.

The Treasury last took “extraordinary measures” at the end of 2021 to avoid a default. The legislature was finally able to agree and raise the debt limit.

WHY DO WE HAVE A DEBT LIMIT?

Before World War I, Congress had to approve every bond issue. The debt limit was created to fund the war effort without requiring a constant series of reconciliations.

Since then, a tool created to facilitate the functioning of government has become a source of dysfunction, fueling partisan warfare and creating economic risk as the debt has increased in size over the past 20 years.

HOW RISK IS BRINKMANSHIP?

There is a palpable concern about how Biden, McCarthy and the Democratic Senate will find common ground.

A default could result in millions of job losses, a deep recession that would resonate around the world and, ironically, higher interest rates that would make managing the national debt more difficult.

McCarthy said Tuesday that talks about the possible spending cuts Republicans are seeking in exchange for raising the debt limit should begin immediately, though the Biden administration has equated that demand with holding the U.S. economy hostage.

“Who wants to threaten the nation in any way at the last minute of the debt ceiling?” said McCarthy. “Nobody wants to do that. So we ask, “Let’s change our behavior now. Let’s sit down.’

The Biden administration wants to raise the credit limit without preconditions. White House press secretary Karine Jean-Pierre ruled out talks with McCarthy on Tuesday.

DO DEBT LIMITS SHOWDOWNS HELP REDUCE GOVERNMENT DEBT?

Not really.

The Congressional Budget Office estimates that annual budget deficits will grow from about $1 trillion to more than $2 trillion over the next 10 years. As the baby boomer generation retires, government programs like Medicare and Social Security will outstrip incoming tax revenues. This suggests that the government would need drastic spending cuts, larger tax increases, or a combination of these options.

In 2011, when Barack Obama was president and Biden was vice president, there was a bipartisan agreement to raise the debt ceiling by $900 billion in exchange for $917 billion worth of automatic spending cuts over 10 years.

But the deleveraging never fully materialized.

After Donald Trump became president in 2017, Republican lawmakers fueled further debt increases by passing deficit-funded tax cuts. With the onset of the coronavirus pandemic in 2020, the debt accelerated even further, resulting in massive government borrowing to pull the US out of a deep recession.

The CBO last year estimated that the US debt would surpass $40 trillion by 2032.