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What happens now that the US has reached the debt ceiling?

It’s up to Congress to raise the debt ceiling, which Republicans refuse to do without budget cuts. Meanwhile the Treasury will have to do some juggling.

Treasury will use “extraordinary measures” until debt ceiling deal reached

Secretary Janet Yellen informed Congress that the Treasury Department has begun to take “extraordinary measures” to keep the United States from breaching the debt ceiling. The statutory cap, currently set at $31.4 trillion, on how much the nation can borrow to pay its bills to “meet its existing legal obligations” approved by past legislation can only be raised by Congress.

However, Republicans, who now have a narrow majority in the House of Representatives, are refusing to approve an increase without major budget cuts to discretionary spending. Secretary Yellen has told lawmakers that the US will reach the “X-date”, when the nation will no longer be able to meet its obligations and thus default on its debt, will fall around 5 June, roughly within six months.

What are “extraordinary measures”?

Extraordinary measures are accounting maneuvers the Treasury Department uses to keep the US from breaching the debt ceiling when Congress reaches an impasse on raising it. The first time this occurred was in 1985, although it had been used on other occasions since, it has become ever more common, enacted 9 times since 2010.

The moving of funds from one account to another through extraordinary measures simply delays when the US can no longer meet its existing obligations. As the US uses deficit spending, borrowing money to pay for spending approved by Congress instead of covering expenditures purely with taxes and revenue, there is no immediate way for the government to produce an instant surplus to avoid raising or suspending the debt ceiling.

Failure to do so would result in the nation defaulting on its debt creating an economic catastrophe here and abroad as investors and markets lose faith in the financial backing of the dollar, the backbone of the world economy.

There are some who think that the Treasury could use unprecedented actions to avoid that from happening. These include minting a large-denomination coin, selling large amounts of gold or even invoking the Fourteenth Amendment, which states that the US has an obligation to meet all its financial obligations, in order to override the statutory debt limit. All these options are unlikely as no one knows what economic and political consequences they could have.

Policymakers will battle over the budget

Republicans are hoping to use the standoff to negotiate steep spending cuts. They have not ruled out trimming Social Security and Medicare among them, which former President Trump has advised against. President Joe Biden has said that he is willing to have “honest debates” about tackling the nation’s ballooning debt but White House press secretary Karine Jean-Pierre reiterated that “raising the debt ceiling is not a negotiation.”

Past confrontations about raising the debt ceiling have run until the “X-date” has come perilously close to being crossed. While investors believe that default will be averted once again, taking the negotiations down to the wire will produce market volatility.