The United States is about to reach the debt ceiling that it can have in circulation, as Treasury Secretary Janet Yellen warned this Friday in a letter sent to Congress.
There was debate about when that milestone would be reached, but it was not expected to be so imminent.
Raising the debt ceiling is the responsibility of Congress and with the House of Representatives in Republican hands it will not be easy to achieve.
The Treasury calculates that it will only have money to continue paying its bills until June, and that after taking extraordinary measures.
In an unlikely extreme case, the federal government's inability to borrow could lead to an unprecedented debt default that would rock markets and send the country into recession.
“I am writing to inform you that as of Thursday, January 19, 2023, the outstanding debt of the United States is expected to reach the legal limit.
Once the limit is reached, the Treasury will have to start taking certain extraordinary measures to prevent the United States from defaulting on its obligations, ”Yellen points out in his letter.
The debt limit is the total amount of money the United States Government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military wages, interest on national debt, tax refunds and other payments.
It is currently set at 31.381 million dollars.
Yellen has announced to Congress the implementation of extraordinary measures to exceed that limit, but warns that they will serve to weather the situation "only for a limited time."
“The cash and extraordinary measures are unlikely to run out before early June,” he says, explaining that it is critical that Congress act in a timely manner to raise or suspend the debt limit.
Failure to comply with the Government's obligations would cause irreparable damage to the US economy, to the livelihoods of all Americans, and to global financial stability,” says the Treasury Secretary.
political battle
It comes as a surprise that Yellen makes the announcement and her request at such short notice.
Until now it was expected that the debt limit would be reached towards the middle of the year.
Extraordinary measures can provide a cushion until then, but the countdown is on.
The debt limit has been one of the priority issues for rogue Republicans who prevented their leader, Kevin McCarthy, from being elected Speaker of the House of Representatives until the 15th ballot.
One of the rebel leaders, Texan Chip Roy, implied that his faction had wrung a commitment from McCarthy to link raising the debt ceiling to imposing spending cuts on the Biden government.
The White House, however, does not want to make concessions and the political battle is on.
In an extreme case, rather than default on the debt, the United States could try to implement creative solutions to avoid exceeding the limit.
For example, issuing debt with a low face value but very high interest rates.
With it, it could obtain more resources without exceeding the nominal value of outstanding debt.
The possibility of issuing a multi-million dollar bill with which to meet expenses has also been considered as a theoretical hypothesis.
All these alternatives have contraindications, but not as many as the suspension of the payment of the debt.
The Treasury Secretary reminds congressmen that even threats that the US government might default have caused real damage in the past, including the only downgrade in US history in 2011, when he lost AAA.
“Raising or suspending the debt limit does not authorize new spending commitments or cost taxpayers money.
It simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have incurred in the past,” adds Yellen.