WASHINGTON — With congressional leaders seemingly deadlocked on a deal to raise the nation’s debt ceiling, risks are growing that the US will run out of money to pay all its bills next week, putting the country in uncharted waters to what happens next.
He debt ceiling refers to a law which limits the total amount of federal debt that is allowed to be outstanding. The US hit that limit in January, but the Treasury Department says it has been using workarounds, or what it calls «extraordinary measures,» to keep the government paying its bills on time.
But Treasury Secretary Janet Yellen says those efforts will dry up next week and the US could run out of money to meet all its obligations as soon as June 1. The Treasury Department does not know the exact date, as there is a constant flow of money in and out of federal coffers, but Goldman Sachs projects the date could be closer to June 8 or 9, and the Bipartisan Policy Groups says the date is likely between June 2 and 13.
Regardless of the exact date, without legislative action, the US is days away from being unable to pay all of its bills, something that has never happened before. Like anyone facing a budget crisis, Yellen will have to figure out who gets paid and when, until the country receives another influx of tax payments expected in mid-June. according to the Bipartisan Policy Center. Those payments could keep the federal government cash positive until mid-July.
Yellen hasn’t given much detail about what specifically would happen once the country’s bills exceed its income, but economists and former government officials have a few theories about who might get paid and how.
Debt holders first in line?
One option for Yellen would be to first pay bondholders the interest owed to them on US Treasuries and delay paying all other bills, such as Social Security and veterans’ benefits, until the government has enough money to do it, economists and budget policy experts said. That was a strategy Treasury officials said they had played in 2011 when the US was close to default back then.
Failure to pay bondholders would likely have the biggest impact on the economy because of the chaos it would create in financial markets, since Treasuries are considered one of the safest investments in the world.
Failure to make those payments will almost certainly lower the US’s credit rating, making it more expensive for the government to borrow money and raising interest rates for anyone else looking to borrow money borrowed for a house, a car or with a credit card. the economists said. It would also cause banks to cut lending significantly, cutting lines of credit to businesses that need to borrow money for everything from an expansion to making that month’s payroll. The value of the dollar would also be affected, impacting companies that buy or sell goods abroad.
But even if the US does not default on its debt, the risk of getting so close and not being able to make other payments could be enough for ratings agencies to downgrade the US’s credit rating, as in 2011 when S&P downgraded the US credit rating when it came dangerously close to default.
Prioritizing payments from bondholders could also have political consequences for the Biden administration if investors are seen getting paid while others, like Social Security recipients, don’t get their checks on time.
«Politically it’s a disaster because you’re effectively paying a Chinese bondholder before you pay someone’s Social Security payment,» said Stephen Myrow, managing partner at Beacon Policy Advisors, who worked at the Treasury Department during the Trump administration. Obama.
Late government payments
Prioritizing payments outside of what is owed to debt holders becomes more complicated, as choosing which of the thousands of bills to get paid would be a political, logistical and legal effort for Yellen and President Joe Biden.
Yellen has saying that the Treasury is not set up to do so and that failure to make payments, either to debt holders or to veterans, would be considered a default.
Given the payment system the federal government uses, it may not even be logistically feasible right now to issue some payments, such as to Social Security recipients, and not to others, such as federal workers, said Shai Akabas, director of economic policy from the Bipartisan Policy Center. If some groups get paid and others don’t, it could also expose the administration to legal challenges.
Alternatively, policy experts expect Yellen to postpone paying all other bills until the US has enough revenue in its accounts to pay all the bills at once. That could mean a delay of several days for those waiting for government benefits, which are scheduled to go out for some recipients on June 2. The longer the stalemate continues, the greater the delay.
“We assume that the US Treasury would continue to make principal and internet payments on time, but they would postpone interest-free payments until they had enough money in their checking account to be able to pay all of that day’s interest-free obligations in one go. time. , not prioritize them and make sure they had enough money to pay the interest,” said Wendy Edelberg, director of the Hamilton Project and a senior fellow at the Brookings Institution.
The delay in payments is likely to be relatively short-lived because the US will receive an influx of tax payments on June 15, which could provide enough cash to get the country through July before it runs into a shortage again. cash, Shai said. Akabas, director of economic policy at the Bipartisan Policy Center.
However, a much bigger disruption would likely come from the physiological effects of the US not being able to pay all of its bills. Stocks could fall 20% in that scenario, falls similar to those seen during the 2008 financial crisis, according to a report from the UBS.
What is the difference between a default and a shutdown?
A debt ceiling breach would look different from a government shutdown in several ways and would have far greater consequences for the economy than a shutdown, which the US has been through numerous times in recent years.
“We know what a government shutdown looks like, we’ve been there before, it doesn’t look pretty but it’s not catastrophic either,” Akabas said. «With the debt limit, it’s totally uncharted territory and we could see ramifications that would affect every American household.»
A government shutdown is triggered when Congress fails to pass legislation to finance the government. As a result, federal workers are not being paid, non-essential workers are staying home, and certain services that receive federal funding, like National Parks, are closed. But mandatory programs like Medicare and Social Security are not affected.
But in the event of a debt ceiling breach, all federal spending is affected, including Medicare payments, Social Security checks and veteran’s benefits. Federal workers will likely still be required to report to work, but may not be paid on time.
Coins and the 14th Amendment
Economists and former lawmakers have proposed various workarounds, but Yellen and other top administration officials have largely dismissed them.
One proposal has been the minting of a $1 trillion platinum coin by the US Mint that the Treasury could deposit with the Federal Reserve. A 1990s law gives the Mint the authority to produce coins of any denomination, but Yellen called the move a «trick» and Federal Reserve Chairman Jerome Powell said as much. indicated would not accept the coin.
The Treasury could also reissue bonds, auctioning off older bonds at a higher rate, which would help attract additional money without adding debt. But economists said this new form of debt could create chaos in financial markets that could be as bad as what would be seen in the event of a default.
Another proposal has been for Biden to invoke the 14th Amendment that says «the validity of the public debt shall not be questioned,» which some have interpreted to mean that the debt ceiling is unconstitutional. Under that interpretation, the US can continue issuing debt to raise money, assuming investors are willing to buy it and trust that it will be stopped in court.
Biden said he has considered invoking Amendment 14, but acknowledged that it would likely end up in court, essentially causing a default while the measure is litigated.
Another option would involve congressional action. If House Speaker Kevin McCarthy isn’t willing to introduce a bill to raise the debt ceiling to the floor without the funding cuts that Republicans and Democrats oppose, a majority of members could introduce it. themselves. It is unlikely that there will be enough support for this so-called discharge or time request option given the lengthy process involved.
Even if one of those proposals were to go through, it still doesn’t prevent the larger psychological effects that would occur in global financial markets if the US were to be in a position where it couldn’t pay all its bills, Edelberg said.
“All these workarounds that people are thinking about, they don’t solve the basic problem that, as a consequence, you’re going to have all this consternation because my goodness, we can’t even do this basic level of government and in the meantime, it all depends on the court to determine whether any issued Treasury bonds were issued illegally,» Edelberg said. «None of these solutions prevents the worst of the problem.»