Key Takeaways:
- The US is dangerously close to reaching its debt limit, warned Janet Yellen.
- The Treasury plans to take extraordinary measures to help the government.
PATNA (CoinChapter.com) — US Treasury Secretary Janet Yellen has warned that the US would reach its debt limit on Jan 19 and likely default on its debts unless the treasury takes “certain extraordinary measures.”
Yellen, in a letter to House Speaker Kevin McCarthy, stated that the US would reach its statutory debt limit within the coming week. The US government increased the debt ceiling to $31.381 trillion in Dec 2021.
The treasury could not estimate how long its emergency actions would help the US stave off defaulting on its debts. However, Yellen assured Congress that the “cash and extraordinary measures” would likely last till Jun 2023.
The Treasury Secretary warned McCarthy that it was essential that Congress either increase or suspend the debt limit.
Failure to meet the government’s obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans, and global financial stability
US Treasury Secretary Janet Yellen wrote in her letter to the House Speaker
Reacting to Yellen’s letter, the White House said it would not negotiate over raising the debt ceiling. In a press conference, White House spokesperson Karine Jean-Pierre stated, “This [raising the debt limit] should be done without conditions.”
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The Treasury’s planned extraordinary measures would include redeeming existing investments of the Civil Service Retirement and Disability Fund (CSRDF) and the Postal Fund. Moreover, Yellen plans to suspend any new investments planned by both bodies.
Furthermore, the Treasury would suspend the reinvestment of the Government Securities Fund of the Federal Employees Retirement System Thrift Savings Plan. Treasury Secretary Yellen expects the measures would help the US avoid defaulting on its debt limit.
Why the US Hitting Its Debt Limit Could Be Bad
The debt limit is the maximum amount of money the US can borrow cumulatively to meet its legal obligations. The government created the debt limit under the Second Liberty Bond Act (1917).
Over the years, the US government has raised or suspended the debt ceiling numerous times to avoid a default by the US government on its debt. Meanwhile, the debt limit crisis renewed debate about the consequences of the US being unable to borrow money.
Some Republicans argue that the consequences of defaulting on the debt limit are overblown. But, Democrats, the White House, and several economists warn of dire scenarios such as a shutdown of basic government functions, a fractured healthcare system, etc.
While defaulting on the debt limit is bad, even approaching the limit has terrible ramifications. For example, in 2011, then-President Barack Obama had a standoff with the Republicans over spending and debt.
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The argument was resolved, but not before the US was a hairbreadth away from defaulting on the debt limit. As a result, the stock market plunged, with investors, consumers, and business owners rattled by the lawmakers’ near brush with the debt limit.
The stock market took more than six months to recover. Additionally, the cost of borrowing for corporations spiked dramatically. Consumer confidence and small-business optimism both dropped.
However, an actual breach could be much worse. If the US defaults on its debt ceiling, the treasury would be unable to pay lenders who hold federal debt. As such, investors might demand higher interest rates for lending money to the government in the future.
US investors were unhappy with the announcement’s timing, stating that the government should have warned everyone earlier. Some even called the announcement a “fake debt limit drama” by Washington DC.
