The United States hit the debt ceiling. what happened after that?

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The US Treasury is now taking “extraordinary measures” to meet its debt obligations, after the US government reached its borrowing limit of $31.4 trillion.

But economists say the reprieve could only last for a few months, setting the stage for a dramatic showdown between the Biden administration and lawmakers on Capitol Hill that risks plunging the US government into default.

Here’s what you need to know about the US debt ceiling, and what’s at stake.

What is the debt ceiling and why does it matter?

The debt ceiling is the legal limit on the amount the federal government can borrow. Congress set the cap, and it was last extended in December 2021 to $31.4 trillion after Republican Senate Minority Leader Mitch McConnell gave in to demands from Democrats, who controlled the White House and both houses of Congress at the time.

But now, with Republicans in control of the House and Democrats in charge in the Senate, the cap must be raised again if the government is to continue to meet its payments and avoid default.

While leaders in both parties insist they will work to avoid a worst-case scenario, fears of default have risen sharply in Washington this year amid threats from some House Republicans to use the debt ceiling debate as leverage for other policy changes, particularly big ones. Budget cuts.

In order to generate additional borrowing capacity and expand its available cash stock of less than $400 billion, US Treasury Secretary Janet Yellen said the Treasury Department will first suspend new investments in various government accounts and make adjustments to the Federal Employees Savings Plan, which invests in non-marketable securities. that mature every day.

Under laws set by Congress, the Treasury can pause reinvestment altogether. This money will become full after the debt ceiling impasse is resolved.

Once these initial measures have been exhausted, the Treasury Department may attempt to prioritize certain payments over others, chief among them interest and principal payments on government debt. Programs at risk could include Social Security and Medicare coverage for military personnel and other veterans’ benefits in addition to federal payroll.

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Yellen said the government is “unlikely” to run out of cash before “early June,” but estimates differ widely as to when the US will actually face an outright default. Many experts predict a so-called “date X” between July and August, while some have set a deadline for a later date.

Analysts at JPMorgan said they expect the Treasury to create just under $450 billion in borrowing capacity in the coming months, suggesting that a default could be delayed until November. Much will depend on the strength of incoming tax receipts, with weaker streams pushing that date forward.

Why is Congress divided over raising the debt ceiling?

Republicans have tried before to use the debt ceiling as leverage to demand deep spending cuts, most memorably in 2011, when President Barack Obama and Senate Democrats were at odds with House Republicans from the Tea Party movement. While an 11-hour deal was reached in this case, it only came after a market turnaround and a downgrade of the US debt rating by Standard & Poor’s.

Ten years later, House Republican lawmakers again demanded deep budget cuts in return for raising the borrowing limit. The most vocal conservative member of the House Republican caucus already flexed its muscles this month when it forced Kevin McCarthy’s hand into a number of concessions before backing his candidacy for Speaker of the House.

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Among those concessions was a commitment not to raise the debt ceiling without securing deep budget cuts, something that has raised fears of a confrontation between hawkish House Republicans and more centrists in their party, not to mention Democrats, both in the Senate. and the White House.

Karen Jean-Pierre, the White House press secretary, has repeatedly insisted that the Biden administration will not negotiate, and that the debt limit will be lifted “without conditions.”

What happens if lawmakers can’t strike a deal?

Policymakers and economists have warned that a US debt default would have catastrophic economic and financial consequences. To underscore how painful it is, the prospect of such an outcome so close to date X is probably costly.

Gregory Daco, chief economist at EY-Parthenon Consultants, warned that forcing the Treasury to prioritize payments would lead to a “self-inflicted recession” and risk “severe turmoil in financial markets.” He expects an “immediate cut” in US growth, of up to 5 percent year on year.

The Third Way, a left-leaning think tank, estimates that the US could lose as many as 3 million jobs in the event of a default, which is the equivalent of nine months of employment growth. The cost of a 30-year mortgage would also increase on average by $130,000, while the average retirement savings for older workers could shrink by $20,000.

“We are well aware of the potential consequences that families, our national economy, and the global economy could face if we default on our commitments, so why flirt with such economic disaster when we have the solutions?” said Rachel Snyderman, senior associate director for business and economic policy at the Bipartisan Policy Center.

Can the Biden administration act on its own or get help from the Federal Reserve?

Historically, the White House has not stepped in to act unilaterally to raise the debt ceiling. But some legal scholars argue that a president can invoke the Fourteenth Amendment to the United States Constitution, which includes a clause regarding public debt: “The validity of the public debt of the United States, authorized by law . . . may not be questioned.”

Others, however, reject that interpretation, and warn that if Biden tries to use the Fourteenth Amendment, he could leave the move open to legal objections.

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Another, more unprecedented option, would be for the Treasury to mint a platinum coin in huge denomination — the figure is often a float of $1 trillion — then deposit the coin in the Federal Reserve and use the money to meet its obligations. But the proposal is also controversial, with many economists warning of the precedent it would set for future debt ceiling discussions. Yellen repeatedly rejected the idea.

In dusting off the debt ceiling in the past, the US central bank has also made it clear that it is limited in its ability to offset the damage caused by a default.

“No one should assume that the Fed or anyone else can protect the markets or the economy in the event of failure to meet government obligations,” Chairman Jay Powell said in September 2021 in the midst of another round of negotiations.

One option that central bankers have previously discussed to mitigate the fallout is for the Fed to simultaneously buy distressed securities and sell those it owns. In 2013, Governor Powell called this option “abominable.”

Such an option could harm the Fed’s political independence, which Libby Cantrell, the head of public policy at Pimco, said Yellen and the Biden administration would also want to avoid.

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