Currently the limit on the amount the US government can borrow is a mind-boggling $31.4 trillion. This limit was reached this past January and since then the US Treasury has been using “extraordinary measures” to continue to pay government bills. Funds from these measures, such as using available tax revenue or borrowing from the retirement accounts of federal workers (not allowed by private employers), are said to become exhausted by about June 1st or so.
The government borrows (or issues debt) because it spends more than it takes in via tax revenue. These borrowed funds are used to pay government workers, but for numerous other critical reasons including:
- continuous payments to Social Security recipients
- reimbursement to doctors for Medicare
- salaries for US Military and military contractors
- payments on existing US Treasury debt
Payments on existing US government debt, including interest and principal, is the priority due to US Treasury securities being – literally – the world’s “risk free” security. Therefore, it is predicted that in order to prevent global financial market mayhem, payment on US Treasury debt is #1 on the list in any (albeit unlikely) default situation.
There is precedent for a potential US debt default or government shutdown from 2011 when President Obama and House Speaker John Boehner in the 11th hour came to a compromise on spending and debt. Even after that crisis was averted, the debt rating on US Treasury securities was downgraded for the first time in history from AAA to AA+, where it remains today.
Recent commentary from former US Federal Reserve Vice Chairman, Alan Blinder*, reminds us that the “debt limit” could be abolished altogether. Blinder states that among advanced nations, only Denmark has a debt limit law. The obvious reason for having a debt limit law is to create fiscal discipline, but over decades fiscal discipline in the US (and numerous countries) has gone by the wayside. So, Blinder suggests abolishing the law and doing away with the problem “forever”.
But, as the argument goes, doing away with the debt limit law eliminates key leverage by the party ruling Congress to begin the “cutting spending” conversation. And therein lies the rub.
One of the key solutions to averting a default – or any delay in payments on US Treasury debt – is for legislative action being taken swiftly and an agreement struck by the President and Congress. Of course, the “cutting spending” conversation is painfully obvious too??
Keen observers state that the likelihood of a US debt default is low, but it will come down to the wire once again.
*WSJ.com. April 19, 2023.