The U.S. reached its debt limit in January and Congress and President Biden remain at an impasse over raising it. Without the ability to issue new debt, the Treasury department has begun ‘extraordinary measures’ to conserve cash and pay the most pressing government bills. In a letter to House Speaker McCarthy this week, Janet Yellen said, “our best estimate is that we will be unable to continue to satisfy all of the government’s obligations by early June, and potentially as early as June 1, if Congress does not raise or suspend the debt limit before that time”. While that certainly sounds ominous, we have been here before and there are other steps that the Treasury can take to avoid defaulting on payments.
Government receipts over the past 12 months totaled $4.6 trillion, while interest on government bonds totaled $583 billion, so the Federal government does have ongoing cash to make interest payments on government bonds if it slashes other spending. Of course, prioritizing debt payments would avoid a debt crisis, but the spending cuts could be a shock to the economy (and investor sentiment) that would increase the chances of a recession.
There have been numerous debt limit crises over the years. In 2021, 2019, 2018, 2017, 2013, and 2011 the government came within a month of the ‘x’ date when the Treasury could no longer pay bills. 2011 was the closest in recent history, when a deal between Congress and the Obama White House was reached only hours before Treasury’s deadline. The frequency of last-minute debt limit negotiations has trained the market to largely look beyond the looming crisis, expecting that a deal will eventually be reached.
Could this year be different? As I have said many times, political outcomes are difficult to predict, but the most likely outcome is that a deal is reached, even if it is at the last moment. In my estimation, the chances of a default on debt payments by the U.S. Government are extremely low. However, there is a chance that the negotiations will go beyond June 1st and begin to impact government spending. If that happens then it could be one more hit to a struggling economy. Let’s all hope that a deal is reached soon.
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