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The US just hit the debt limit. What happens now?

Treasury Secretary Janet Yellen said officials have started to deploy “extraordinary measures” to make sure the country can keep paying its bills.

The US Capitol is seen at night on November 29, 2021. Melina Mara/The Washington Post via Getty Images
Madeleine Ngo covers economic policy for Vox. She previously worked at the New York Times, the Wall Street Journal, Bloomberg, and the Philadelphia Inquirer.

The United States hit the debt ceiling — the total amount of money the federal government can legally borrow — on Thursday as lawmakers continued to clash over negotiations to raise the limit. The Treasury Department is now deploying what it calls “extraordinary measures” to make sure the country can keep paying its bills.

Although “extraordinary measures” might sound alarming, economists say the Treasury has a history of using them, and those changes shouldn’t immediately impact the lives of Americans. They essentially work as accounting tools that temporarily allow the government to continue funding its normal operations and help buy Congress more time to reach a deal.

In a letter to congressional leadership, Treasury Secretary Janet Yellen said the Treasury Department started to use some of its extraordinary measures after the current debt limit of $31.4 trillion was projected to be hit on Thursday, but she said the amount of time the measures would last was subject to “considerable uncertainty.”

Although this means the country will be able to avoid defaulting on its debt for now, if that does eventually happen for the first time, the consequences would be dire. That would not only be bad for Americans who depend on government benefits like Social Security checks, but it would also create chaos in the stock market and inflict pain across the broader economy.

Americans shouldn’t be immediately impacted by “extraordinary measures”

Extraordinary measures are basically accounting maneuvers. For example, the Treasury Department would pause investments in some government funds, then make them up once the debt limit is raised or suspended.

By suspending investments in certain funds, the Treasury temporarily reduces the amount of debt these funds hold, which would allow the government to stay under the borrowing cap and continue standard operations for a longer period, said Rachel Snyderman, a senior associate director of business and economic policy at the Bipartisan Policy Center.

In her letter, Yellen said a “debt issuance suspension period” would begin on Thursday and last through June 5. The Treasury will start redeeming existing and suspending new investments in the Civil Service Retirement and Disability Fund, which provides benefits to government workers, and suspend investments in the Postal Service Retiree Health Benefits Fund.

In a letter last week, Yellen said she also expected the Treasury to start suspending reinvestment of the Government Securities Investment Fund of the Federal Employees Retirement System Thrift Savings Plan this month.

Other potential options include suspending the daily reinvestment of securities held by the Exchange Stabilization Fund, which is used to buy or sell foreign currencies, or suspending the issuance of State and Local Government Series securities. Yellen has said it was unlikely that both the Treasury’s cash and measures would be exhausted before early June.

Synderman said the measures were a “temporary fix” that Americans should not immediately notice. For example, she said, the Treasury would not be “dipping into the hard-earned savings of federal employees” by carrying out the measures, and the Treasury would eventually restore the funds and any interest that would have otherwise been earned.

According to the Treasury, civil service benefit payments, postal retiree health benefit payments, and payments from the retirement fund for federal employees would continue to be made as long as the country had not exhausted its extraordinary measures. Once a deal on the debt limit was reached, the funds would be “made whole” and recipients would be unaffected.

Treasury secretaries have a history of deploying these measures in recent years, regardless of which political party holds control of the White House or either chamber of Congress, Snyderman said. The Treasury last deployed these measures in August 2021 before lawmakers eventually raised the debt limit. They were also used in March 2019, December 2017, and March 2017, according to a timeline compiled by the Bipartisan Policy Center. The measures were first used in September 1985 and formally authorized in October 1986.

But Snyderman said the Treasury cannot rely on these actions indefinitely since funds can be completely disinvested. When a fund is down to zero, the measure can no longer be used to extend borrowing capacity.

“Once extraordinary measures kick in, the average American is not going to see a change overnight,” Snyderman said. “Extraordinary measures signal that the clock is ticking and as time progresses, we are going to see changes in the economy.”

The government is limited in what it can do after

If the extraordinary measures are exhausted and the Treasury runs out of cash, economists say there isn’t much the federal government can do to pay all of its obligations on time until lawmakers reach a deal.

Michael Strain, the director of economic policy studies at the conservative American Enterprise Institute, said the United States was facing the “highest probability of some sort of a default in decades.”

If the country reached a point where it could not pay all of its bills, Strain said the Treasury could attempt to prioritize some obligations. For instance, Treasury officials could choose to first pay all bondholders who hold federal debt, then military salaries and Social Security benefits, but then decide they don’t have enough money to cover bills incurred by the National Park Service, Strain said. The Treasury has not had to prioritize certain payments over others before, however, and it is unclear if that would be successful or met with legal challenges.

“There are real questions about whether or not that would work,” Strain said.

Some have also raised the prospect of the treasury secretary minting a trillion-dollar coin, depositing it into the Treasury’s account at the Fed, and then using those funds to keep the government operating until the debt limit is raised, although economists say that’s unlikely. Congress has made clear that its will is to control the debt ceiling, and the Treasury likely wouldn’t try to clearly subvert that, said Wendy Edelberg, the director of the Hamilton Project and a senior fellow in economic studies at the Brookings Institution.

The Federal Reserve could also attempt to stabilize financial markets and boost the economy by purchasing Treasury bonds if the country does default on its debts, Edelberg said. But the central bank could also be wary about worsening inflation, which is still uncomfortably high, she said. The Fed has been aggressively raising interest rates for months to bring rapid price increases under control.

“In a different environment, you might think that the Fed could flood the market with money in order to somehow offset the negative effects of this,” Edelberg said. “But it would have to be careful not to do it in a way that fuels inflation.”

Although a default could have disastrous impacts on the economy, Edelberg said she was not very confident that lawmakers would reach a resolution on the debt limit soon.

“It’s irresponsible,” Edelberg said. “It would be a completely self-inflicted wound.”

Update, January 19, 11:20 am: This story has been updated to include the US hitting the debt ceiling Thursday morning and the response from Treasury Secretary Janet Yellen.