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The US is approaching the legal limit of indebtedness. What measures will the government adopt if they do not reach an agreement?

2023-01-19T14:05:22.837Z


The Treasury Department warns that once that limit is reached, extraordinary measures must be taken to prevent the United States from breaching its obligations.


By Josh Boak -

The Associated Press

WASHINGTON — On the verge of reaching the nation's legal debt limit this coming Thursday, the United States government is resorting to “extraordinary measures” to avoid default.

Sounds disturbing, right?

But, take a deep breath.

Technically, the phrase refers to a bunch of accounting solutions.

Yes, accountants.

Because the debt ceiling limits the issuance of government bonds — the way the United States borrows money — these solutions transfer funds between accounts and should keep the government running until at least June, according to a letter sent by the Treasury Secretary Janet Yellen last week.

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In theory, President Joe Biden and Congress will use the extra time to reach an agreement to raise the country's $31.38 trillion legal debt ceiling.

These negotiations are often intense and down to the last second, with immense economic damage at stake.

But there have been about 80 agreements to raise or suspend the debt ceiling since the 1960s.

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What could be worrying is not the existence of extraordinary measures, but what happens if they run out in the middle of this year without an agreement being reached.

Economists have warned that this could trigger a global financial crisis.

So far, House Speaker Kevin McCarthy and Biden are playing what could be a dangerous game of who can last the longest without blinking, with the largest economy on the planet caught in the middle.

Here are some questions and answers about the situation:

What are extraordinary measures?

Yellen's letter from last Friday listed two measures that will start to be applied this month in order to avoid a government default.

First, the Government will temporarily suspend payments to the funds for retirement, disability and health of federal employees.

Second, it will suspend the reinvestment of soon-to-maturity government bonds in the retirement savings accounts of government workers.

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By suspending payments, the White House can reduce the amount of outstanding debt.

That allows the Treasury Department to continue funding government operations, according to Yellen's letter.

What allows the Treasury Department to apply these measures?

There is no discussion here.

Congress has given the Treasury Department the power to do so.

Because these are retirement accounts, no one is hurt by government notes.

The funds will be restored in full once the suspension or increase in the debt ceiling is enacted.

It's not necessarily the measures that can hurt the economy, but doubts among consumers and businesses about whether lawmakers will increase the debt limit.

How big are these retirement funds?

By the end of fiscal year 2021, there were $986 billion in net assets in civil service and federal employee retirement funds, according to a report from the Office of Personnel Management.

Required government contributions to the funds are large enough for these extraordinary measures to last for nearly five months.

is this common?

“Treasury Departments in every Administration for the last several decades have used these extraordinary measures when necessary,” Yellen wrote in her letter.

The measures were first used in 1985 and have been used at least 16 times since then, according to the Commission for a Responsible Federal Budget, a fiscal watchdog.

Why is there a debt limit?

Before World War I, Congress needed to approve the issue of each bond.

The debt limit was created as a solution to finance war activities without the need for a constant series of votes.

Since then, a tool created to make government work easier has become a source of dysfunction, stoking partisan warfare and creating economic risks as debt has grown for the past 20 years.

What risks does the political strategy imply?

It looks alarming, and there is no sign that Biden, McCarthy and the Democratic-controlled Senate are finding common ground.

A default could result in the loss of millions of jobs, a deep recession that would have global implications and, ironically, higher interest rates that would complicate managing the federal debt.

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McCarthy declared on Tuesday of this week that negotiations over possible budget cuts that Republicans are seeking in exchange for raising the debt ceiling should begin immediately, even as the Biden administration has likened that demand to a hostage-taking of the US economy.

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"Who wants to put the country under some kind of threat at the last minute of the debt limit?" McCarthy asked.

"Nobody wants that.

That's why we're asking, 'Let's change our behavior right now.

Let's negotiate".

The Biden government wants the debt ceiling to be increased without any pre-existing conditions.

White House press secretary Karine Jean-Pierre on Tuesday ruled out any negotiations with McCarthy.

Do Debt Limit Confrontations Help Reduce Government Debt?

Not much.

The Congressional Budget Office (CBO) estimates that annual budget deficits will grow from nearly $1 trillion to more than $2 trillion in the next 10 years.

The mismatch in the coming years increasingly reflects government spending on programs like Medicare and Social Security that is outpacing tax revenue.

That suggests that the government will need to severely cut spending, apply big tax increases, or a combination of both.

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

But debt reduction never fully materialized.

After Donald Trump became president in 2017, Republican lawmakers pushed further increases in debt by passing deficit-financed tax cuts.

Debt accelerated further with the onset of the coronavirus pandemic in 2020, which caused massive government borrowing to pull the country out of a deep recession.

The CBO estimated last year that the federal debt would exceed $40 trillion by 2032.

Source: telemundo

All news articles on 2023-01-19

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