What Are the US Treasury’s ‘Extraordinary Measures’ That Can Postpone Debt Limit Disaster?

After the United States hits its self-imposed cap on borrowing funds, dubbed the “debt ceiling,” on Thursday, the US Treasury will be forced to impose what it describes as “extraordinary measures” to ensure the federal government can continue to pay its bills for a period of time.

However, Treasury Secretary Janet Yellen has warned the extraordinary measures will only buy Congress so much time, and are likely to run out by June. At that time, the US government will default on its debts, destroying its credit rating, forcing massive cuts to the federal government budget, and likely plunging the country into an immediate recession.

So what are those tools at the Treasury’s command that can forestall this catastrophe for a time? Yellen explained some of them in a recent letter to House Speaker Kevin McCarthy (R-CA), who has pledged to turn the debt ceiling into a political fight to win future spending caps from Democrats.

Benefits Cuts

Yellen said she will halt spending on several key benefits programs for federal government employees and former employees, including redeeming existing and suspend new investments in the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund, as well as pausing reinvestment of the Government Securities Investment Fund of the Federal Employees Retirement System Thrift Savings Plan.

Shuffling Payments

The Treasury can also shift money temporarily between different government agencies and departments to make payments as they come due, in order to maximize the use of money already set aside for spending. It can also halt a process it uses to provide financing for foreign governments by suspending the daily reinvestment of securities held by the Exchange Stabilization Fund.

Prioritize Bondholders

Another possibility is that the Treasury could prioritize paying back bondholders, which might forestall default altogether, but would result in one federal program after another losing its funding, which could cause its own social, economic, and political chaos. However, according to some US media reports, such prioritization might not be possible, since the Treasury adopted an automated system.

Minting a $1 Trillion Coin

Perhaps the most hilarious solution to the crisis would be for the Treasury to mint a commemorative platinum coin of whatever value it chooses, as per a 1997 law absolutely not intended for such a use. However, in 2021, Yellen dismissed this as a “gimmick,” saying that “what’s necessary is for Congress to show that the world can count on America paying its debts.”

"The platinum coin is equivalent to asking the Federal Reserve to print money to cover deficits that Congress is unwilling to cover by issuing debt, it compromises the independence of the Fed conflating monetary and fiscal policy, and instead of showing that Congress and the administration can be trusted to pay, to pay the country’s bills, it really does the opposite," Yellen said.

What Comes After?

If Congress decides to pass a new bill raising the debt ceiling before the US government defaults, then the paused spending will be “made whole” again. The present debt ceiling is $31.4 trillion, the level it was raised to in 2021.

Congress created the ceiling during the First World War in order to ease the process of passing regular and large spending bills to fund the US’ war preparations. Debts had previously been authorized piecemeal.

However, in recent decades, conservatives opposed to federal government spending on social programs have turned the debt ceiling into a political weapon, threatening the country with economic disaster if their demanded spending cuts aren’t agreed to. Part of the deal Speaker McCarthy cut with a far-right GOP faction in order to become Speaker included a pledge to do just that.

If Congress can’t find a way through the impasse by the time the extraordinary measures run out, then the US will officially default on its debts - something it’s never done before. In 2011, during a previous crisis, the US came within hours of defaulting - a situation that caused Standard & Poor’s to downgrade the US’ credit rating to AA+, where it has remained since.