The United States Armed Forces uses an alert system called the “defense readiness condition” (DEFCON) to describe different levels of readiness, or states of alert, for military personnel. It increases in severity from DEFCON 5 (least severe) to DEFCON 1 (most severe) to match varying military situations. For example, DEFCON 1 would signal the outbreak of nuclear war.
In a letter sent to Congressional leaders this week, Treasury Secretary Janet Yellen essentially elevated the U.S. debt limit condition to DEFCON 2: default is not imminent, but it’s getting really, really close. Yellen was unable to give an exact date on which Treasury’s cash reserves would be insufficient to meet its obligations but did say, “the most likely outcome is that cash and extraordinary measures will be exhausted during the month of October.”
The federal government has been operating on borrowed time since the debt limit was reinstated on August 1. Since then, Treasury has employed a host of temporary extraordinary measures to preserve cash, curtail the issuance of Treasury securities, and avoid breaching the statutory debt limit, but these strategies have a finite lifespan. Absent any action by Congress soon, the Treasury will run out of cash. [Note: To monitor the Treasury Department’s daily operating cash balance, see Table 1 in the Daily Treasury Statement.]
The government will receive an infusion of cash in mid-September from quarterly estimated corporate and individual income tax payments, but the current surge in coronavirus infections across the nation, recent devastation caused by hurricane Ida and wildfires out west, and the cost of processing and resettling tens of thousands of Afghan refugees, all complicate Treasury’s short-term forecast of daily receipts and outlays. Simply put, Secretary Yellen isn’t exactly sure how much revenue the Treasury will collect in the next 60 days, nor how much money it will have to disburse.
October may seem far off, but the number of legislative days between now and October 31 is woefully few. The Senate is planning to be in session a total of 28 days between now and October 31, and the House, which doesn’t return until September 20, has only 18 legislative days on its schedule—and both chambers plan to spend a majority of that time debating the second installment of President Biden’s Build Back Better agenda.
It doesn’t help that Republicans and Democrats are engaged in a maddeningly juvenile game of chicken. Senate Republican Leader Mitch McConnell (R-KY) is insisting that Democrats raise the debt limit without any Republican support by putting a debt limit increase in their Build Back Better bill—a strategy that will permit his members to avoid a politically tough vote and allow his party to criticize vulnerable Democrats in the runup to the 2022 elections.
House Speaker Nancy Pelosi (D-CA) is pushing back, blaming the need to raise the debt limit on Republican policies under the Trump administration that added nearly $8 trillion to the national debt, including a nearly $2 trillion tax cut in 2017 that passed without any Democratic support. She wants to add the debt limit fix to regular-order legislation that would temporarily fund the government after September 30 and provide emergency assistance to victims of the recent natural disasters. The Pelosi bill would need Republican support in both chambers to pass.
One thing is certain, this gamesmanship isn’t good for the financial markets or the broader economy. As Secretary Yellen wrote in her letter:
"We have learned from past debt limit impasses that waiting until the last minute to suspend or increase the debt limit can cause serious harm to business and consumer confidence, raise short-term borrowing costs for taxpayers, and negatively impact the credit rating of the United States.
A delay that calls into question the federal government's ability to meet all its obligations would likely cause irreparable damage to the U.S. economy and global financial markets. At a time when American families, communities, and businesses are still suffering from the effects of the ongoing global pandemic, it would be particularly irresponsible to put the full faith and credit of the United States at risk."
This week’s letter was Yellen’s third missive to Congress since late July, each imploring Congress to act sooner rather than later. One can only hope that this time Congress actually heeds her advice because in finance as in war, there are no winners if we reach DEFCON 1.