Treasury Secretary Warns That U.S. Government Likely To Hit Debt Limit On Thursday
January 17, 2023—It’s been a little over a year since Treasury Secretary Janet Yellen told a Senate panel the U.S. debt of $28 trillion didn’t matter. Now, 16 months and over two trillion dollars later, Yellen is warning that the government will hit its legal debt limit of $31.381 trillion on Thursday. She estimates Treasury can keep paying its bills until about June, but it won’t be easy. In fact, Treasury is forced to take extraordinary accounting measures to keep the government running.
The extraordinary has become ordinary in American federal bookkeeping.
For Yellen, like many in Washington, the problem is still not the debt; it is the debt limit under U.S. law. It is that limit that the government is about to breach. She suggests in her Jan. 13 letter that Congress “act promptly to protect the full faith and credit of the United States.”
The letter is as standard as letters sent by Yellen’s predecessors, who used similar extraordinary accounting gimmicks to pay the government’s bills. In short, the extraordinary has become ordinary in American federal bookkeeping.
Does Debt Matter Now?
It didn’t make many headlines at the time—with the exception of some news outlets, including the GER—when Yellen asserted that the U.S. government could continue borrowing money and increasing its debt because interest rates were so low.
“But we are in a very low-interest rate environment, which has been true a very long time and um, is likely to true going forward. And an alternative — and I think better measure of fiscal sustainability — is to look at the real net-interest cost of the debt, what is it in real terms costing to service the outstanding debt,” Yellen told the Senate Banking Committe on September 28, 2021.
It’s noteworthy that she predicted, unwisely, that interest rates would remain low. They haven’t. It was six months later that the Federal Reserve predictably began raising its federal funds rate from a low of 0 to 0.25 percent. The policy rate came too late to temper rising inflation. But it set up a policy course of monetary tightening that continues today.
Now, with the Federal Funds Rate of 4.33 to 4.50 percent and other interest rates increasing in response, the federal government pays a higher interest on the money it borrows. For the fiscal year 2022, Treasury estimated the net interest on the debt would be $471 billion. That was when the fed funds rate was 2.5 percent. Now, they’re nearly double that.
Meanwhile, on Capitol Hill, it’s become a radical idea to talk about putting limits on the debt. Understandably, the government needs to pay its creditors’ debts it’s already accumulated. But Washington is far more keen on growing the debt via tax cuts and spending than it is on reducing the burden.
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