Can the Treasury Department prevent the US from defaulting on its debt?

The United States is expected to hit the debt ceiling – the total amount of money the federal government can legally borrow – immediately. If lawmakers still insist on negotiating to raise the debt limit, the Treasury Department will have to begin implementing what it calls “extraordinary measures” to ensure the country can keep paying its bills.

Although the “extraordinary measures” may sound alarming, economists say the Treasury has a history of using them, and the changes will not directly affect the lives of Americans. Essentially it works as an accounting tool that allows the government to continue to fund normal operations and helps buy Congress more time to reach a deal.

In a letter last week, Treasury Secretary Janet Yellen said officials expected the current $31.4 trillion debt limit to be breached on Thursday. He also said that the department could not give an estimate of how long officials could use the extraordinary measures, but that it was unlikely that the cash and Treasury measures would be exhausted before the beginning of June.

If the country ends up defaulting on its debt for the first time, the consequences will be dire. Not only would this be bad for Americans who depend on government benefits like Social Security checks, but it would wreak havoc on the stock market and hurt the broader economy.

Americans should not be directly affected by “extraordinary measures”

The extraordinary measures are accounting maneuvers. For example, the Treasury Department will pause investments in some government funds, then make them if the debt limit is raised or suspended.

By suspending investment in certain funds, the Treasury temporarily reduces the amount of debt the fund holds, which would allow the government to stay under the debt ceiling and continue operating in default for a longer period of time, said Rachel Snyderman, senior associate director of business and economic policy at the Bipartisan Policy Center. .

Yellen said the department plans to implement two measures this month to delay the default: redeeming existing investments and suspending new investments in the Civil Service Retirement and Disability Fund, which provides benefits to government workers, and the Postal Service Retirement Health Benefits Fund. He is also expected to delay the reinvestment of the Government Securities Investment Fund from the Federal Retirement System Savings Plan.

Other potential options include suspending the daily reinvestment of securities held by the Exchange Stabilization Fund, which is used to buy or sell foreign currencies, or suspending the issuance of State and Local Government Series securities.

Synderman said the measure was a “temporary fix” that Americans should not ignore. For example, he said, the Treasury will not “dip into the savings of federal employees” by implementing these measures, and the Treasury will restore any funds and interest that will be incurred.

According to the Treasury, the payment of civil service benefits, the payment of health benefits for postal retirees, and payments from the pension fund for federal employees will continue as long as the state has not exhausted the extraordinary measures. Once an agreement on the debt limit is reached, the funds will be “made whole” and the recipient will not be affected.

Treasury secretaries have a history of enacting such measures in recent years, regardless of which political party controls the White House or one chamber of Congress, Snyderman said. The Treasury last adopted the measure in August 2021 before lawmakers finally increased the debt limit. They were also used in March 2019, December 2017, and March 2017, according to a timeline compiled by the Bipartisan Policy Center. These measures were first used in September 1985 and became official in October 1986.

But Snyderman said the Treasury can’t rely on those actions indefinitely because funds could be disinvested. When the fund drops to zero, the measure can no longer be used to increase borrowing capacity.

“Once these extraordinary measures are put in place, the average American will not see any change overnight,” Snyderman said. “Extraordinary measures signal that as the clock ticks down, we will see a change in the economy.”

The government is limited in what it can do after that

If the extraordinary measures are exhausted and the Treasury runs out of cash, economists say there is little the federal government can do to pay all its obligations on time until lawmakers reach a deal.

Michael Strain, director of economic policy studies at the conservative American Enterprise Institute, said the United States was facing “the highest probability of several defaults in decades.”

If the state reaches a point where it can’t pay all its bills, Strain said, the Treasury can try to prioritize some of its obligations. For example, Treasury officials could choose to pay all bondholders who owe the federal debt, then military pay and Social Security benefits, but then decide they don’t have enough money to cover the bills incurred by the National Park Service, Strain said. The Treasury does not have to prioritize certain payments before others, however, and it is not clear if it will succeed or meet with legal challenges.

“There’s a real question about what we’re going to do,” Strain said.

Some have also raised the prospect of the treasury secretary issuing trillions of dollars, depositing it into a Treasury account at the Fed, and then using the funds to keep the government operating until the debt limit is raised, although economists say that is unlikely. Congress has made it clear that it will control the debt ceiling, and the Treasury likely won’t try to remove it, said Wendy Edelberg, director of the Hamilton Project and senior fellow in economic studies at the Brookings Institution.

The Federal Reserve could also try to stabilize financial markets and boost the economy by buying Treasury bonds if the country defaults on debt, Edelberg said. But the central bank could also be wary of rising inflation, which is still very high, he said. The Fed has been aggressively raising interest rates for months to control rapid price increases.

“In a different environment, you might think the Fed could flood the market with money to offset this negative effect,” Edelberg said. “But we have to be careful not to do it in a way that causes inflation.”

Although a default could have a devastating effect on the economy, Edelberg said he’s not sure lawmakers will pass a debt limit resolution.

“It’s irresponsible,” Edelberg said. “That would be a self-inflicted wound.”