U.S. Treasury Secretary Janet Yellen told House Speaker Nancy Pelosi Friday that unless Congress acted quickly to raise the statutory limit on the amount of money the federal government can borrow, she would be forced to “start taking certain additional extraordinary measures” to prevent the United States government from defaulting on its financial obligations.
In a letter sent to Pelosi and other members of the congressional leadership in both parties, Yellen asserted that an increase or continued suspension of the debt limit “does not increase government spending, nor does it authorize spending for future budget proposals; it simply allows Treasury to pay for previously enacted expenditures.”
With just days to go before the statuary suspension of the debt limit ends at noon on July 31, the need for congressional action has already become a political football. Both parties are trying to use the issue on Capitol Hill to gain leverage over the other to either stop or move through to final passage several pieces of legislation that are a top priority for the Biden Administration.
The full text of the letter is as follows:
Dear Madam Speaker:
As you know, the Bipartisan Budget Act of 2019 suspended the statutory debt limit through Saturday, July 31, 2021. I am writing to inform you that beginning on Sunday, August 1, 2021, the outstanding debt of the United States will be at the statutory limit.
Today, Treasury is announcing that it will suspend the sale of State and Local Government Series (SLGS) securities at 12:00 p.m. on July 30, 2021. The suspension of SLGS sales will continue until the debt limit is suspended or raised. If Congress has not acted to suspend or increase the debt limit by Monday, August 2, 2021, Treasury will need to start taking certain additional extraordinary measures in order to prevent the United States from defaulting on its obligations.
Increasing or suspending the debt limit does not increase government spending, nor does it authorize spending for future budget proposals; it simply allows Treasury to pay for previously enacted expenditures. The current level of debt reflects the cumulative effect of all prior spending and tax decisions, which have been made by Administrations and Congresses of both parties over time. Failure to meet those obligations would cause irreparable harm to the U.S. economy and the livelihoods of all Americans. Even the threat of failing to meet those obligations has caused detrimental impacts in the past, including the sole credit rating downgrade in the history of the nation in 2011. This is why no President or Treasury Secretary of either party has ever countenanced even the suggestion of a default on any obligation of the United States.
The period of time that extraordinary measures may last is subject to considerable uncertainty due to a variety of factors, including the challenges of forecasting the payments and receipts of the U.S. government months into the future, exacerbated by the heightened uncertainty in payments and receipts related to the economic impact of the pandemic. Given this, Treasury is not able to currently provide a specific estimate of how long extraordinary measures will last. However, there are scenarios in which cash and extraordinary measures could be exhausted soon after Congress returns from recess. For example, on October 1 alone, cash and extraordinary measures are expected to decrease by about $150 billion due to large mandatory payments, including a Department of Defense-related retirement and health care investment.
In recent years Congress has addressed the debt limit through regular order, with broad bipartisan support. I respectfully urge Congress to protect the full faith and credit of the United States by acting as soon as possible.
It is highly unlikely members in either party will allow the deadline to be reached without reaching some kind of compromise agreement to forestall the U.S. defaulting on its debt. Such a move would, most economists agree, that even a technical default would put in motion a disruption in the global financial markets of what one economist called “a global disruption of unknown and unknowable proportions.”
Such a collapse, which would provide China an ample boost in their campaign urging the replacement of the dollar as the global reserve currency, would likely be blamed on the Republicans. Fear that it might in turn limits the ability of spending restraint advocates to argue the deadline should be allowed to come and go unless reforms are made.
This game of economic chicken has been tried before, with the first one to blink generally considered the loser.
The specter of inflation haunts Joe Biden’s presidency
Treasury Secretary Janet Yellen got into trouble Tuesday for telling the truth. That morning, at a conference sponsored by the Atlantic, she raised the possibility that one day the Federal Reserve may raise interest rates “to make sure our economy doesn’t overheat.”
Anyone with a basic understanding of economics knew what she was talking about. The combination of President Joe Biden’s gargantuan spending and the accelerating economic recovery may well lead to a rise in consumer prices and hikes in interest rates. But an end to the Federal Reserve’s program of easy money would hurt asset prices and possibly employment as well.
Which is not what most investors want to hear. When Yellen’s words reached Wall Street, the market tanked. By the afternoon she was in retreat, telling the Wall Street Journal CEO summit that she had been misunderstood. “So let me be clear,” she said. “That’s not something I’m predicting or recommending.”
No, of course not. But it still might happen anyway.
A specter is haunting the Biden administration—the specter of inflation. Past inflations have not only harmed consumers, savers, and people on fixed incomes. They have also brought down politicians. Among the risks to the Democratic congressional majority is a rise in prices that lifts inflation to near the top of voters’ concerns, coupled by the type of Fed rate increase that hits stocks and housing. Inflation is one more signpost on the road to Republican revival, along with illegal immigration, crime, and semi-closed public schools embracing far-left critical race theory.
The classic definition of inflation is too much money chasing too few goods. That might also describe America sometime soon—if not already. The economy has started its post-virus comeback. Jobs and growth are on the upswing. U.S. households sit on a trillion-dollar pile of savings. Over the last year, on top of its regular spending, the federal government has appropriated a mind-boggling amount of money: a $2 trillion CARES Act, a $900 billion COVID-19 relief bill, and a $2 trillion American Rescue Plan. And President Biden wants to spend about $4 trillion more.
Surging this incredible amount of cash into an economy that is rapidly approaching capacity may have unintended and harmful consequences. But the Biden administration is either unconcerned about inflation or afraid of bringing it up in public.
Why? Well, one reason is that earlier warnings, after the global financial crisis in particular, didn’t seem to come true. (The inflation may have shown up in the dramatic ascent in prices of stocks and bonds, as well as in odd places such as the market for high-end art.) Another reason is that some economists think a little bit of inflation would be a good thing. But the main explanation may be related to status-quo bias: Inflation hasn’t been a driving force in our economic and public life for decades, and so we blithely assume it won’t be in the future.
Which is why an experienced leader worries about repeating the mistakes of the past. And yet, for a politician who came to Washington in 1973, Joe Biden has a lackadaisical attitude toward inflationary fiscal and monetary policy. Was he paying attention? It was the great inflation of the ’60s and ’70s, caused in part by high spending, the Arab oil embargo, and spiraling wages and prices in a heavily regulated and unionized economy, that helped ruin the presidencies of Gerald Ford and Jimmy Carter.
Inflation led to bracket creep, with voters propelled into higher income tax brackets by monetary forces over which they had no control. And bracket creep inspired the tax revolt, supply-side economics, and the Reaganite idea that, “In this present crisis, government is not the solution to our problem; government is the problem.” The eventual cure for inflation was the painful “shock therapy” administered by Federal Reserve chairman Paul Volcker and what at the time was the worst recession since the Great Depression.
Why anyone would want to repeat this experiment in the dismal science is a mystery. Biden, however, is fixated not on inflation but on repudiating the legacy of the man known for describing it as “always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
Milton Friedman, whose empiricism led him to embrace free market public policy, was the most influential economist of the second half of the 20th century. But Biden has a weird habit of treating Friedman as a devilish spirit who must be exorcised from the nation’s capital. For Biden, Friedman represents deregulation, low taxes, and the idea that a corporation’s primary responsibility is not to a group of politicized “stakeholders” but to its shareholders. “Milton Friedman isn’t running the show anymore,” Biden told Politico last year. “When did Milton Friedman die and become king?” Biden asked in 2019. The truth is that Friedman, who died in 2006, has held little sway over either Democrats or Republicans for almost two decades. But Biden wants to mark the definitive end of Friedman and the “neoliberal” economics he espoused by unleashing a tsunami of dollars into the global economy and inundating Americans with new entitlements.
The irony is that Biden’s rejection of Friedman’s teachings on money, taxes, and spending may bring about the same circumstances that established Friedman’s preeminence. In a year or two, the American economy and Biden’s political fortunes may look considerably different than when Janet Yellen blurted out the obvious about inflation. Voters won’t like the combination of rising prices and declining assets. Biden’s experts might rediscover that it is difficult to control or stop inflation once it begins. And Milton Friedman will have his revenge.