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2021 Debt Limit Analysis

Key Takeaways:

  • Treasury Secretary Janet Yellen has notified Congress that the Treasury Department will exhaust its cash on hand and extraordinary measures sometime in October.
  • This is consistent with BPC’s latest projection: If policymakers do not act on the debt limit, Treasury will most likely have insufficient cash to meet all its financial obligations sometime between October 15 and November 4 (what we call the “X Date”).
  • Due to the unpredictability of cash flows—and thus, all debt limit projections—policymakers need to act in the coming weeks if they intend to ensure that all obligations of the U.S. government are paid in full and on time.
  • After running out of cash, Treasury will be unable to meet approximately 40% of all payments due in the several weeks that follow. How Treasury would operate in such an environment is unclear. Prioritization and delayed payments are two possibilities, but substantial uncertainty exists about operationalizing them.
  • October 1 is a particularly difficult date for federal finances due to a large payment that is owed to the Military Retirement Trust Fund, among other large benefit payments also owed that day. This day will significantly drain Treasury’s cash reserves.
  • Financial and economic risks grow as the debt limit impasse goes on. Interest rates have already risen on short-term Treasury securities that mature around BPC’s X-Date range.
  • Ongoing risks include increasing costs to taxpayers, delayed payments to individuals and businesses, and potentially catastrophic market impacts if the U.S. government actually defaults on its debt (unprecedented in modern history).
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