Yellen warns that the United States will hit debt limit next week

The United States is about to reach the debt limit 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 limit is the responsibility of Congress and with the House of Representatives in Republican hands it will not be easy to achieve. 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 beginning on Thursday, January 19, 2023, the outstanding debt of the United States is projected to reach the statutory limit. Once the limit is reached, Treasury will need to start taking certain extraordinary measures to prevent the United States from defaulting on its obligations,” Yellen said in her letter.

The debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments. It is currently set at $31,381 trillion.

Yellen has announced to Congress the implementation of extraordinary measures, but warns that they will serve to weather the situation and “enables the government to meet its obligations for only a limited amount of time.” “It is therefore critical that Congress act in a timely manner to increase or suspend the debt limit. Failure to meet the government’s obligations would cause irreparable harm to the US economy, the livelihoods of all Americans, and global financial stability,” says the Treasury Secretary.

It is a surprise that Yellen would make the announcement and her request at such short notice. Until now, the debt limit was expected to be reached around mid-year. Extraordinary measures may provide a cushion until then, but the countdown is on. The debt limit has been one of the priority issues for rebel Republicans who prevented their leader, Kevin Mccarthy, from being elected Speaker of the House until the 15th ballot.

One of the rebel ringleaders, Texan Chip Roy, implied that his faction had wrested from McCarthy a compromise to tie raising the debt ceiling to imposing spending cuts on the Biden Administration. The White House, however, does not want to make concessions and the political battle is on.

In an extreme case, rather than reaching debt default, the United States could try to implement creative solutions to stay under the limit. For example, issuing debt with a low face value but very high interest rates. This would allow it to raise more resources without exceeding the face value of outstanding debt. The possibility of issuing a multi-million dollar bill to meet expenses has also been considered as a theoretical hypothesis. All these alternatives have drawbacks, but not as many as the default on the debt.

Yellen reminds congressmen that even threats that the US government might fail to meet its obligations have caused real harms, including the only credit rating downgrade in US history in 2011, when it lost the 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.

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