U.S. hits debt ceiling amid Congressional standoff

STORY: The U.S. government hit its $31.4 trillion borrowing limit on Thursday, forcing the Treasury Department to begin taking what it calls "extraordinary measures" keep paying the nation's bills, raising fears of a potentially catastrophic default on America's debts.

The development comes as a deeply-divided Congress wrangles over whether to raise the nation's debt ceiling.

Without an agreement to boost borrowing, the stalemate could lead to an unprecedented fiscal crisis by the middle of the year.

In a letter Thursday to Republican House Speaker Kevin McCarthy, Treasury Secretary Janet Yellen wrote that she expected to be able to stretch out the government's ability to meet its debts and payments until June 5, and urging the Republican leader to "to act promptly to protect the full faith and credit of the United States."

"Who wants to put the nation in some type of threat at the last minute? A debt ceiling? Nobody wants to do that.

House Speaker McCarthy has denied he wants to put the nation's credit at risk, but has insisted Democrats, including President Joe Biden, agree to spending cuts as part of a debt-ceiling deal.

"Find the compromise and find the commonsense compromise that puts us back on to a balanced budget."

Republicans have proposed a "debt prioritization bill" that would call on Treasury to avoid default by prioritizing certain payments if an agreement on raising the limit cannot be reached.

The White House has adamantly refused to negotiate on those terms, suggesting Republicans are holding the nation hostage.

"This is not a plan, it is a recipe for economic catastrophe. As President Biden has made clear, Congress must deal with the debt limit and must do so without conditions.”

If Congress were to fail to raise the debt ceiling before the Treasury department runs out of accounting tricks to keep paying the bills, the effects will likely be wide-ranging.

Shai Akabas with the Bipartisan Policy Center told Reuters the fight over the debt ceiling poses significant risks to the U.S. economy.

"The short answer, though, is that we don't know just how severe those risks are, because we've never been in a position as a government where we are not meeting all of our obligations in full and on time."

U.S. government spending exceeds tax revenues, and it makes up the shortfall by selling Treasury bonds to investors with the promise of repayment, with interest.

To keep paying its bills and paying interest to borrowers, the U.S. needs to keep borrowing.

But the debt ceiling - or maximum - can only be raised by Congress. And if it cannot continue borrowing to meet expenses, the U.S. could, for the first time, fail to meet its financial obligations, triggering what financial markets call a default.

That could send borrowing cost soaring for everything from mortgages to credit cards, and could tank the U.S. stock market.

And that's apart from the millions of Americans relying on government payments: from government workers to retirees, who might not get the cash they're counting on.

“Well, now let's think about the people who are on the other side of those obligations."

Wendy Edelberg is a senior fellow in economic studies at the Brookings Institution.

"Perhaps those are Social Security recipients who aren't getting paid and fully expect to get paid on a given day, because that's how Social Security payments work. And maybe they have an automatic debit, their account for their rent to be paid the next day. They're not going to have money in their account to pay rent on the next day. All of the people on the other side of those obligations are going to feel the economic pain of delayed payments."

Congress created the debt ceiling in 1917 to give the government greater borrowing flexibility and must approve each increase to ensure that the United States meets its debt obligations and avoids a catastrophic default.