The Blubber

U.S. Treasury Secretary Janet Yellen announced that the government would hit its statutory borrowing limit on Tuesday and begin implementing "extraordinary measures" to avoid breaching the cap, thereby preventing a potentially catastrophic default.

In a letter to congressional leaders on Friday, just three days before the Biden administration hands over control of the U.S. government to President-elect Donald Trump, Yellen stated that extraordinary measures would begin on January 21.

"The period of time that extraordinary measures may last is subject to considerable uncertainty, including the challenges of forecasting the payments and receipts of the U.S. government months into the future," Yellen wrote.

To free up borrowing capacity under the $36.1 trillion debt ceiling, the Treasury will suspend investments in two government employee benefit funds until March 14. As of Thursday, U.S. Treasury borrowings stood at $36.08 trillion. The suspension will affect the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund, halting new investments not immediately needed to pay benefits. By law, these funds must be fully restored once the debt ceiling is raised or suspended.

Yellen emphasized the urgency of action, urging Congress to raise or suspend the debt limit to "protect the full faith and credit of the United States."

Early Challenge for the Incoming Administration

In late December, Yellen warned that the debt cap would likely be reached between January 14 and 23, following Congress's decision not to include an extension or permanent repeal in a last-minute budget agreement.

President-elect Trump had previously called for the debt ceiling to be extended or eliminated, describing the failure to address it in 2023 as "one of the dumbest political decisions made in years." However, many Republican lawmakers view the debt limit as a critical leverage tool in fiscal negotiations.

The issue poses an early test for Scott Bessent, Trump’s pick for Treasury Secretary. During a Senate confirmation hearing on Thursday, Bessent referred to the debt ceiling as a "nuanced convention" and expressed his willingness to work with Congress and the White House to eliminate it if the president desired.

Potential Economic Consequences

The Treasury has a series of extraordinary measures at its disposal to avoid default, which budget analysts suggest could sustain the government for several months, depending on tax revenue performance. However, failure to raise, suspend, or eliminate the debt limit could lead to the Treasury being unable to meet all its obligations, triggering a default with severe economic repercussions.

The debt ceiling is a legislative cap on how much money the government can borrow to cover expenses exceeding tax revenues. Addressing it has been a contentious political task since its inception, as many lawmakers are hesitant to approve additional borrowing.

The debt ceiling dates back to 1917, when Congress introduced limits to provide the Treasury with borrowing flexibility during World War I. The first modern aggregate debt limit of $45 billion was established in 1939. Since then, Congress has approved 103 increases as federal spending consistently outpaced tax revenue. Publicly held debt reached 98% of U.S. GDP in October 2024, compared to 32% in October 2001.