Why US lawmakers are arguing over the debt ceiling again

The Crypto Daily - Movers and Shakers - May 5, 2021

Once a routine affair, adjusting the debt limit is now often used as a political tool by Republicans to extract concessions on federal spending. The stand-offs, which have in the past brought the US dangerously close to default, have always ended in a resolution. It was last suspended in 2019 under the Trump administration, and on August 1 was reinstated at about $28.5tn, which includes all of the debt accrued since the previous suspension.  But tensions are rising again on Capitol Hill as the debt-ceiling deadline is colliding with Joe Biden’s efforts to pass his multitrillion-dollar economic agenda through Congress, rekindling fears that lawmakers will again push negotiations to the brink.

The debt ceiling sets a limit on the amount that the Treasury department can borrow to pay government commitments already approved by Congress.  What is the debt ceiling and why is it an issue again?

Once the ceiling is reached, US lawmakers must either increase or suspend it to allow for the agency to issue new debt and raise the necessary cash to cover its bills — something they have done almost 100 times since the end of the second world war. Here is a guide to what is going on, why it matters and what it will take to avoid a US sovereign debt crisis.

Once those resources are exhausted, it will no longer be able to make good on obligations such as Medicare-related dues and veterans’ benefits. Interest payments on US government debt held by investors could also be interrupted. What is at stake if the debt ceiling is not adjusted?  Shai Akabas, director of economic policy at the Washington think-tank, said the Treasury had already used up most of the “extraordinary measures” or accounting manoeuvres it had available to buy time. These include pausing investments in certain federal retirement and health funds. The Treasury also has on hand about $400bn in cash.

Janet Yellen, US Treasury secretary, warned last week that the Treasury may run out of cash next month. The Bipartisan Policy Center, meanwhile, has pencilled in mid-October to mid-November, with much depending on the highly uncertain trajectory of federal spending and revenues due to the pandemic. How long does Congress have left?

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