Sounds ominous, right?
But – take a breath – the technical word refers to a bunch of accounting workarounds. Yes, accounting.
Because the debt ceiling limits the issuance of government bonds – the way the US borrows money – these workarounds shift money between accounts and should keep the government open until at least June, according to a letter last week by Treasury Secretary Janet Yellen.
In theory, President Joe Biden and Congress should have used that extra time to come up with an agreement to raise the $31.38 trillion debt ceiling. The talks often get heated and come down to the wire, with major economic damage in the balance. But there have been about 80 deals to raise or delay the debt ceiling since the 1960s.
What may be worrying is that there are no extraordinary measures, but what happens if we get tired this summer without a deal. Economists have warned that it could trigger a global financial crisis.
So far, House Speaker Kevin McCarthy and Biden are playing what could be a dangerous game of chicken with the world’s largest economy in the middle.
Some questions and answers about the situation:
What is an “extraordinary step”?
Yellen’s Friday letter listed two measures she will begin this month to prevent a government default.
First, the government will suspend payments to pension, disability and health benefits funds for federal employees. Second, it will delay the reinvestment of maturing government bonds in the retirement savings accounts of government employees.
By delaying these payments, the government can reduce the amount of outstanding debt. This allows the Treasury Department to keep funding government operations, according to Yellen’s letter.
What allows the Treasury to use these measures?
There is no dispute. Congress has authorized the Treasury to do so.
Because this is a retirement account, no one is harmed by the government in the same way as an IOU. Funds are made whole after a debt ceiling increase or moratorium becomes law. Not only are the measures likely to hurt the economy, but uncertainty among consumers and businesses about whether lawmakers will increase the debt ceiling.
How big is this pension fund?
There were $986 billion in net assets of civil service and federal employee pension funds at the end of fiscal year 2021, according to a report by the Office of Personnel Management. The required government contribution to the fund is large enough to rely on these extraordinary measures within five months.
How common is this?
“Treasury secretaries in every Administration over the past decade have used these extraordinary measures when necessary,” Yellen wrote in the letter.
The measure was first implemented in 1985 and has been used at least 16 times since then, according to the Committee for a Responsible Federal Budget, the fiscal watchdog.
Why do we have a debt limit?
Before World War I, Congress had to approve every bond issue. The debt limit was created as a solution to finance the war effort without requiring a continuous vote.
Since then, the tools created to facilitate the functioning of government have become a source of dysfunction, fueling partisan warfare and creating economic risks as the debt has increased over the past 20 years.
How risky is brinkmanship this time?
It looks alarming — and it’s unclear how Biden, McCarthy and Senate Democrats will find common ground. A default can cause millions of job losses, a deep recession that will reverberate globally and, ironically, higher interest rates that will make it harder to manage the federal debt.
McCarthy said on Tuesday that talks should begin soon on the potential spending cuts that Republicans want in exchange for increasing the debt limit, although the Biden administration has noted the demand to hold the US economy hostage.
“Who wants to put the country under some kind of threat at the last minute of the debt ceiling?” McCarthy said. “No one wants to do that. That’s why we asked, ‘Let’s change now. Let’s sit down.'”
The Biden administration wants the loan cap extended without preconditions. White House press secretary Karine Jean-Pierre said Tuesday that she had not spoken to McCarthy.
Will the debt limit showdown help reduce government debt?
Not so much.
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.
The imbalance in the coming years will increasingly reflect government spending on programs such as Medicare and Social Security that exceed tax revenue. This suggests that the government may need severe cuts in spending, major tax increases or some 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 limit by $900 billion in return for $917 billion in automatic spending cuts over 10 years.
But debt reduction never ends.
After Donald Trump became president in 2017, Republican lawmakers added more debt by passing deficit-funded tax cuts. The debt increased with the onset of the coronavirus pandemic in 2020, which led to massive government debt to pull the US out of a deep recession.
The CBO last year estimated the U.S. debt would exceed $40 trillion by 2032.
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