If Congress does not come to an agreement on the raising the debt ceiling, the U.S. Treasury will be unable to pay its liabilities in October, a situation that could bring dire consequences, The Bipartisan Policy Center (BPC) reported Wednesday.
The Congressional Budget Office reported June 29 that the legislative body will have no choice but to raise the debt ceiling, given that the U.S. Treasury is set to run out of liquidity by mid-October if no decision is reached. Lawmakers will soon face a decision on whether or not to raise the federal debt ceiling.
Treasury Secretary Steve Mnuchin urged Congress in late May to raise the debt ceiling before leaving for the August recess, or even sooner, to avoid shocking financial markets and imposing some potentially dire liquidity risks. Mnuchin enacted “extraordinary measures” in March to ensure that the federal government could pay its bills through the summer, but warned that those measures would be ineffective at staving off a solvency crisis in the fall.
“The exact date when the federal government will be unable to fully pay all of its bills remains uncertain, but it has become clearer that it will be reached sooner rather than later,” Shai Akabas, fiscal policy director at BPC, said in a statement Wednesday. “To avoid the serious economic consequences that could occur if the government was unable to fully pay its bills, Congress will need to act in a timely manner.”
Federal spending is likely to exceed federal revenues in October, as it has outpaced revenues in the month of October for the past half decade with an average cash deficit of $104 billion, BPC reports. The majority of the federal government’s liabilities in October come at the beginning of the month, meaning it is likely the Treasury could default within the first two weeks of the month.
Programs with the likelihood of pushing the government past the debt limit in October include Social Security, Medicare and the Military Retirement Trust Fund.
One thing known for sure is that the federal government could run out of funds to pay back individuals who have invested in Treasury bonds. There are many holders of Treasury bonds, including regional banks and pension funds for millions of Americans and even foreign governments, like Japan and China.
If the government started defaulting on its debts to these entities, it could cause the value of U.S. bonds to nosedive. That would, in turn, force the federal government to pay out higher rates of returns to investors. If that happens, worldwide interest rates could skyrocket, given that global rates are linked to the value of U.S. bonds.
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