Topline
The U.S. Treasury stands to run out of cash as soon as early June if the debt limit isn’t lifted in the coming months, Treasury Secretary Janet Yellen warned Friday as she urged lawmakers to take action on an issue that experts believe will drag on throughout the year, potentially harming the economy and even risking a historic U.S. debt default.
“Failure to meet the government’s obligations would cause irreparable harm to the U.S. economy,” … [+]
Key Facts
In a Friday letter to the House, Yellen said the nation’s debt is projected to reach its statutory limit of roughly $31.4 trillion on January 19, forcing the Treasury to start taking “extraordinary measures” to help pay for the government’s operations and prevent the United States from defaulting on its debt obligations.
Such measures will include cutting off investments to federal retirement, health benefits and disability funds for civil servants and federal government retirees, Yellen said, cautioning the steps would enable the government to operate “for only a limited amount of time,” though at least until early June.
“Failure to meet the government’s obligations would cause irreparable harm to the U.S. economy,” she added, urging Congress to increase or suspend the debt limit “in a timely manner.”
In a Friday note to client, Bank of America analyst Mark Cabana estimated the Treasury may have until mid-August or September before the measures run out, but he warned uncertainty around how and when the debt limit is raised or suspended will likely to remain a “significant” issue this year; the exact timing ultimately depends on the Treasury’s income and expenses.
Key Background
According to the Treasury, Congress has either raised, extended or revised the definition of the debt limit 78 times since 1960, and it has yet to fail to act on the debt limit when necessary. Still, economists at Goldman Sachs on Monday warned the debt limit debacle this year could be the worst since the 2011 crisis that triggered a market correction. Government spending deadlines will “pose a greater risk this year than they have for a decade,” the economists led by Jan Hatzius warned, pointing to the divided Congress as a complicating factor for crucial legislation, with an “extremely thin” margin of Republican control in the House and a two-vote lead by Senate Democrats.
What To Watch For
Republican leadership in the House has already signaled the party won’t easily push through new debt limit legislation, with new rules introduced earlier this week that include several opportunities to object to legislation meant to increase spending, taxes or the deficit. According to Goldman, the rules are a sign Republican leaders could try to use the government’s growing debt to stoke fears of prolonged inflation, particularly after the larger-than-expected omnibus spending bill passed in late 2022 despite conservative opposition.
Further Reading
Debt Limit Showdown And Government Shutdown Pose Greatest Risk In A Decade—Here’s What To Expect (Forbes)
