Treasury Says Extraordinary Measures to Avoid Default Start Thursday

Starting Thursday, the US is expected to reach its statutory maximum of $31.381 trillion dollars. The total encompasses all “existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments,” according to the Treasury Department.

At that point, Treasury will begin to take what are called “extraordinary measures” to meet obligations without technically falling into default. These are essentially accounting measures — putting off certain contributions to federal employee pension funds to start — that put off the crisis. However, the government’s ability to do so would likely run out by sometime in June.

An actual default would be disastrous, not just for the country but the entire global economy. Depending on who is estimating, such a result could cause credit markets to freeze, massive job layoffs, turmoil in international markets, the loss of a preferred reserve currency for the dollar, and plummeting asset values including commercial real estate as international investors who saw the US as a safe haven for their money would become distrustful.

Will this come to pass? Probably not. As John Luke Tyner, portfolio manager and fixed income analyst at Aptus Capital Advisors previously told GlobeSt.com, “They’ll probably get a deal done.” It’s always happened before — eventually. But that isn’t always soon enough.

The question comes down to the dynamics in Congress. “The debt ceiling gets raised every time it needs to get raised,” Philip Wallach, a senior fellow at the American Enterprise Institute, tells GlobeSt.com. “In the 2010s, lawmakers figured out they could suspend the debt ceiling through a given date. But there’s no way lawmakers want to cause the US Treasury to default on its bond payments. There’s no way any significant political party wants default on its brand.”

Many who are worried have looked at the current dynamics in Congress, especially in the House, because any measure to raise or eliminate the debt ceiling would need approval of both chambers and then a signature by President Biden, who would presumably do so.

“There may really be some core group of people that want to vote against any raising of the debt feeling,” says Wallach, who studies Congress and its budget process. “That group of people isn’t that big. If you told me it was 50 people, I’d be surprised. Any time the leadership puts its mind on putting through a raise, it can get something through, especially something short and temporary.”

And as Wallach points out, “If you were in a situation staring at the possibility of a default and you had Secretary Yellen yelling about disaster, you can bet that 100% of the Democrats would vote for a bipartisan deal.” Such a deal might include caps on discretionary defense and non-defense spending, as happened in 2011, or it might be something that delivers no benefit to Republicans.

“It’s not a very good point of leverage for fiscal conservatives because there’s such a strong presumption that it has to get raised,” Wallach says.