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…OK, folks, let’s get some popcorn and watch “The Debt Ceiling Farce 2021” as it unfolds! Everyone knows how this farce will end. Since 1960, the farce played 78 times. Each time, after everyone got through extorting concessions from the other side, Congress either raised the debt ceiling, extended it, suspended it, or changed the definition of “debt.” That’s how it ends.
…During the debt-ceiling farce, the Treasury Department is allowed to use certain “extraordinary means” – more on those in a moment – to keep the government from defaulting. After the debt ceiling is lifted, new debt gets issued and those entities are made whole. In the end, everything gets caught up and nothing changes.
The suspense doesn’t lie in how it ends, because we know that, but how long they drag it out, and how close “we” get to the out-of-money day and, this time around, the out-of-money-day is in October or November, according to estimates by the Congressional Budget Office.
…It’s a farce because Congress told the Administration to spend this money but then doesn’t allow the Administration to raise the money via debt sales to spend this money as Congress had told it to. It’s just nuts, and foreigners scratch their heads every time, and so do we, but that’s how the system works.
The one thing the debt ceiling never ever does is reduce deficit spending. It just temporarily limits borrowing until default moves into view, and then the floodgates are opened again.
Were Congress to fail to extend the debt ceiling, the U.S. government would not be able to pay its bills and would default causing financial markets around the world to crash, in turn causing every member of Congress to lose half or more of their assets in no time – and that’s exactly why this will never happen.
As of August 1, 2021, the gross national debt outstanding on July 31 became the debt ceiling, $28.43 trillion, and that’s where the debt now sits. The U.S. government cannot add to it, but it can roll over its maturing debts.
On August 2, Yellen spelled out in her letter to Congress the first “extraordinary measures,” as they’re called, she will take to keep the U.S. from defaulting, as authorized by law – initially raiding the contributions made by members of three big federal retirement systems: The Civil Service Retirement and Disability Fund, The Postal Service Retiree Health Benefits Fund and the Government Securities Investment Fund (G Fund) of the Thrift Savings Fund that are part of the Federal Employees’ Retirement System, and when that has reached the limits, Yellen will inform Congress of other “extraordinary measures” she will take.
The government has $390 billion in its TGA, and it can take some “extraordinary measures” but it is burning a huge amount of money every day, and at some point, it needs to issue new debt, or it’s going to default….If the TGA account gets drawn down…close to zero before Congress votes to lift the debt ceiling, a 10,000-point drop by the Dow will motivate Congress to do anything, even lift the debt ceiling, after which every entity that the government has wrung out will be made whole.
Editor’s Note: The above version of the original article by Wolf Richter, has been edited ([ ]) and abridged (…) for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.
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