Treasury Secretary Janet Yellen has written to Congress saying the US Treasury Department has begun a “debt moratorium” amid a standoff in Congress over raising the nation’s debt ceiling.
The U.S. Treasury Department announced on Thursday that it had begun taking steps to prevent a sovereign debt default as the country exceeded its borrowing limit.
Congress is deadlocked on raising that debt ceiling. The issue has been a fairly frequent feature of American politics in recent years.
“I respectfully urge Congress to act immediately to protect the full faith and trust of the United States,” Treasury Secretary Janet Yellen wrote in a letter to congressional leadership, announcing the initiation of “emergency measures” to prevent at least one technical bankruptcy. .
The Treasury Department has warned Congress that the tools it uses to stop new borrowing will only help for a limited time — likely no more than six months. In Yellen’s letter on Thursday, she listed June 5 as a possible end date for now.
If there are precedents, politicians breaking the deadlock before that date may prove the most likely way out of the deadlock.
Yellen had already warned of the risk of “irreparable damage”
Yellen said that because of the “debt moratorium,” the Treasury Department will not be able to fully invest a portion of the Civil Service Retirement and Disability Fund, among other impacts.
Yellen had written another appeal last week, warning that “the government’s failure to meet its obligations would cause irreparable damage to the US economy, the livelihoods of all Americans and global financial stability.”
Opposition Republicans have so far refused to approve the annual authorization of continued government borrowing through 2023. Although this authorization is considered almost automatic, the US has faced similar confrontations in the past, most notably during Barack Obama’s two terms in office when Democrats did not control both houses of Congress.
Republicans hold a majority in the House of Representatives, while Democrats just held onto their hold on the Senate in the November 2022 midterm elections.
Biden and Speaker of the House McCarthy are in the spotlight
The burden of finding a solution will likely fall primarily on two men: President Joe Biden and Republican Congressman Kevin McCarthy, the new Speaker of the House of Representatives. Currently, their positions seem irreconcilable.
House Republicans are demanding negotiations on the spending cuts deal. It’s unclear how much McCarthy would like to cut back on those talks. It’s not even clear, if he succeeds in his goals, whether he could convince Republican lawmakers to support some kind of deal. The 15 rounds of voting it took to secure his position as Speaker of the House demonstrated the degree of intra-party discord among Republicans right now.
Biden, meanwhile, has insisted on a “clean” increase in the debt limit so far, saying he is not willing to hold talks with Republicans. Reductions in borrowing or spending could have a serious impact on his latest spending and investment policy landmark, known as the Deflation Act.
On Wednesday, White House press secretary Karine Jean-Pierre said it was Republicans’ “constitutional responsibility” to protect the full faith and allegiance of the US, even when in opposition.
“We’re just not going to negotiate it,” Jean-Pierre said. “They should feel the responsibility.”
McCarthy, meanwhile, argues it’s irresponsible for Biden to expect he can raise the debt ceiling without consultation when he doesn’t have control of Congress.
“Why create a crisis about it?” McCarthy asked last week. “I mean, we have a Republican House, a Democratic Senate. We have the president there. I think it’s arrogant to say, ‘Oh, we’re not going to negotiate almost anything,’ and especially when it comes to financing.”
How big is the US national debt?
The debt limit is currently set at $31.4 trillion (about €29,000,000,000,000), more than the country’s annual GDP, which was in the region of $23 trillion in 2021, the last full year for which data is available .
Like most national governments around the world, US debt levels rose significantly during the COVID pandemic – and also in the decade following the 2008 financial crisis. At the end of 2019, US debt was about 23 trillion dollars. At the end of 2007, it was about $9 trillion.
By comparison, Germany’s national debt of around €2.5 trillion is slightly smaller than annual GDP, but it has also been rising rapidly as a percentage of GDP over the past two years.