Diego Thomazini
By Joseph Purtell
The U.S. Treasury begins extraordinary measures with total debt passing the statutory limit.
Congress has the “power of the purse”: It authorizes payments and spending, while the U.S. Treasury is responsible for funding the resulting fiscal balance. An additional restriction that has been in place in varying forms for over 100 years is the debt limit, which sets a statutory ceiling on the total amount of federal debt outstanding. Given the chronic budget deficits that Congress has run over the past two decades, these restrictions have often become binding; indeed, in just the last decade, there have been 10 separate pieces of legislation to either suspend or extend the debt limit. Now the U.S., as it often has in the past, finds itself exceeding the most recent statutory limit yet again.
On January 19, Treasury Secretary Janet Yellen sent a letter to Congress detailing that the Treasury Department had entered a “debt issuance suspension period” (DISP), a term indicating that the overall federal debt had exceeded the current statutory limit of $31.38 trillion, commonly known as “hitting the debt ceiling.” Within the DISP, the Treasury will utilize extraordinary measures—in essence, accounting methods available to create temporary borrowing headroom—while Congress works on a resolution. In detailing the plan forward, Secretary Yellen said she believes that these measures will allow the government to fund itself until at least June 2023.
If Congress does not raise or suspend the debt limit by the time extraordinary measures have depleted, the Treasury will be left to use what is remaining of its cash balance and eventually experience a technical default—technical, in a sense, because the U.S. remains solvent but does not have the authority to raise funds to make all its payments. Such an event has never happened in U.S. history, but high-profile incidents—specifically the 2011 budget impasse—led S&P to issue an unprecedented downgrade in the U.S. credit rating.
The market implications of hitting the debt ceiling tend to be subtle. In the lead-up to the exhaustion of extraordinary measures during the 2013 debt ceiling showdown, near-maturity Treasury bills meaningfully cheapened, only to quickly revert upon Congressional resolution. News coverage of ongoing deliberations will likely increase, especially as we near the summer; however, given the widely understood negative ramifications of failing to suspend or extend the debt limit, we ultimately expect a resolution to be delivered without much noticeable effect on financial markets generally and Treasury bills in particular.
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