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Explaining how hitting the federal debt limit isn’t as ominous as it sounds

WASHINGTON. On the cusp of hitting the country’s legal borrowing limit on Thursday, the government is resorting to “extraordinary measures” to avoid a default.

Sounds threatening, right?

But – take a breath – this phrase technically refers to a lot of accounting workarounds. Yes, accounting.

Because the debt ceiling limits the issuance of government bonds – the way the US borrows money – these workarounds move money between accounts and should keep the government open until at least June, according to a letter last week from Treasury Secretary Janet Yellen.

In theory, President Joe Biden and Congress should use this extra time to craft an agreement to raise the nation’s $31.38 trillion statutory debt ceiling. These conversations often escalate to the point of a nervous breakdown, causing severe economic damage. But since the 1960s, there have been about 80 transactions to raise or suspend the borrowing limit.

The concern might not be the existence of emergency measures, but what would happen if they were exhausted this summer without a deal. Economists warn that this could lead to a global financial crisis.

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

Letter from Treasury Secretary Janet Yellen to Speaker of the House Kevin McCarthy of California, photographed Friday, January 13, 2023, notifying Congress that the US is projected to hit its debt ceiling on January 19 and then resort to “extraordinary measures.” ” to avoid default. (AP Photo/John Elswick)(John Elswick / ASSOCIATED PRESS)

A few questions and answers about the situation:

Yellen’s Friday letter lists two measures that will go into effect this month to prevent the government from defaulting.

First, the government will temporarily suspend payments to pension funds, disability funds, and sickness benefits for federal employees. Second, it will suspend the reinvestment of maturing government bonds in government employee retirement savings accounts.

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

There is no dispute there. Congress gave the Treasury the authority to do so.

Since these are retirement accounts, the government equivalent of an IOU won’t hurt anyone. The funds become intact after the debt ceiling increase or suspension becomes law. These are not necessarily measures that could hurt the economy, but rather doubts from consumers and businesses about whether lawmakers will raise the borrowing ceiling.

As of the end of fiscal year 2021, the net assets of public service and federal employee pension funds were $986 billion, according to a report from the Office of Human Resources. The necessary government contributions to the funds are large enough to rely on these emergency measures for about five months.

“In recent decades, Treasury secretaries in every administration have resorted to these emergency measures when needed,” Yellen wrote in her letter.

These measures were first used in 1985 and have been used at least 16 times since then, according to the Committee for a Responsible Federal Budget, the financial oversight body.

Before World War I, Congress had to approve every bond issue. The debt limit was created as a workaround to finance the war effort without the need for a permanent series of votes.

Since then, a tool designed to make government work easier has become a source of dysfunction, fueling partisan warfare and creating economic risk as debt levels have risen over the past 20 years.

This looks unsettling – and it is not clear how Biden, McCarthy and the Democratic Senate will find a common language. A default could result in the loss of millions of jobs, a deep recession that would reverberate globally, and, ironically, higher interest rates that would make it harder to manage the federal debt.

McCarthy said on Tuesday that talks should immediately begin on potential spending cuts sought by Republicans in exchange for raising the debt limit, though the Biden administration has equated the demand with holding the US economy hostage.

“Who wants to put a nation at some last-minute debt ceiling threat?” McCarthy said. “No one wants to do this. That’s why we ask, “Let’s change our behavior now.” Let’s sit down.”

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

Not so much.

The Congressional Budget Office estimates that the annual budget deficit will rise from about $1 trillion to more than $2 trillion over the next 10 years.

Increasingly, the imbalance in the coming years reflects government spending on programs like Medicare and Social Security that exceeds tax revenue. This suggests that the government will need drastic spending cuts, large tax increases, or a combination of both.

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

But the debt reduction never came to fruition.

After Donald Trump became president in 2017, Republican lawmakers spurred further debt increases with deficit-financed tax cuts. Debt accelerated further with the onset of the coronavirus pandemic in 2020, which prompted massive government borrowing to bring the US out of a deep recession.

Last year, the CBO estimated that the US debt would exceed $40 trillion in 2032.

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