US Could Default On Its Debt by June 1st, Janet Yellen Warns

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But Treasury Secretary Janet Yellen says those efforts will be exhausted in the coming week and the U.S. could run out of money to meet all its obligations as soon as June 1. The Treasury Department doesn't know the exact date, since there is a constant flow of money coming in and out of the federal coffers, but Goldman Sachs projects the date could be closer to June 8 or 9, and the Bipartisan Policy Groups says the date is likely between June 2 and 13.

Like anyone facing a budget crunch, Yellen will have to determine who gets paid and when — until the country gets another influx of tax payments expected in mid-June, according to the Bipartisan Policy Center. Those payments could keep the federal government cash positive until mid-July.

Yellen hasn’t given many details on what specifically would happen once the country’s bills outstrip its revenues, but economists and former government officials have some theories on who might get paid and how.

Debt holders first in line?
One option for Yellen would be to pay bondholders the interest they are owed on U.S. Treasuries first and delay paying all other bills, like Social Security and veterans benefits, until the government has enough money to do so, said economists and budget policy experts. That was a strategy Treasury officials said they had gamed out in 2011 when the U.S. came close to default back then.

Failing to pay bondholders would likely have the biggest repercussions across the economy because of the chaos it would create in the financial markets, since Treasuries are seen as one of the safest investments in the world.

A failure to make those payments would almost certainly trigger a downgrading of the U.S. credit rating, making it more expensive for the government to borrow money and driving up interest rates for anyone else looking to borrow money for a home, car or with a credit card, said economists. It would also cause banks to significantly pull back on lending, cutting off lines of credit to businesses that need to borrow money for everything from an expansion to making that month’s payroll. The value of the dollar would also be affected, having an impact on companies that buy or sell goods overseas.

But even if the U.S. doesn’t default on its debt payments, the risk of coming so close and not being able to make other payments could be enough for the rating agencies to downgrade the U.S. credit rating, as in 2011 when S&P downgraded the U.S. when it came perilously close to a default.

Giving priority to bondholder payments could also come with political consequences for the Biden administration if it’s viewed as investors getting paid while others, like Social Security recipients, miss getting their checks on time.

“Politically it is a disaster because you are effectively paying a Chinese bondholder before you are paying someone’s Social Security payment,” said Stephen Myrow, a managing partner of Beacon Policy Advisors, who worked in the Treasury Department during the Obama administration

Delay in government payments
Prioritizing payments outside of what’s due to debt holders gets more complicated since picking and choosing which of the thousands of bills get paid would be a politically, logistically and legally fraught endeavor for Yellen and President Joe Biden.

Yellen has said that the Treasury isn’t set up to do it and that failure to meet any payments — whether to debt holders or veterans — would be considered a default.

Given the payment system the federal government uses, it might not even be logistically feasible at this point to issue some payments, such as to Social Security recipients, and not to others, such as federal workers, said Shai Akabas, director of economic policy at the Bipartisan Policy Center. If some groups got paid and others didn't, it could also open the administration to legal challenges.

As an alternative, policy experts expect Yellen would hold off on paying all other bills until the U.S. has enough revenue in its accounts to pay all the bills at once. That could mean a delay of several days for those expecting government benefits, which are scheduled to go out for some beneficiaries on June 2. The longer the impasse goes on, the longer the delay would become.

“We assume that the U.S. Treasury would continue to make principal and interest payments on time, but they would postpone making noninterest payments until they had enough money in the checking account to be able to pay all of that day's noninterest obligations all in one fell swoop, not prioritizing them and making sure they had enough money to make interest payments,” said Wendy Edelberg, director of the Hamilton Project and a senior fellow at the Brookings Institution.

The delay in payments would likely be relatively short-lived because the U.S. is set to get an influx of tax payments on June 15, which could provide enough cash to get the country through July before it once again runs into a cash crunch, Akabas said.

A much bigger disruption, though, would likely come from the physiological effects of the U.S. not being able to pay all its bills. Stocks could drop 20% in that scenario, similar to declines seen during the financial crisis of 2008, according to a report from UBS.

What's the difference between a default and a shutdown?
We know what a government shutdown looks like, we have been there before, it doesn’t look pretty but it also isn’t catastrophic,” said Akabas. “With the debt limit it is totally uncharted territory and we could see ramifications that would affect every American household.”

But in the case of a debt ceiling breach, all federal spending is affected, including Medicare payments, Social Security checks and veterans benefits. Federal workers would likely still be required to report to work, but may not get paid on time.

Coins and the 14th Amendment
Several workarounds have been proposed by economists and former policymakers, but Yellen and other top administration officials have largely ruled those out.

Even if one of those proposals was acted upon, it still doesn’t get around the larger psychological effects that would occur in the global financial markets if the U.S. were in a position where it couldn’t pay all its bills, said Edelberg.

“All these workarounds people are thinking of, those don’t solve the basic problem that in the aftermath you will have all this consternation because holy smokes we can’t’ even do this basic level of governing and in the meantime it’s all up to the court to determine if some Treasuries issued were illegally issued,” said Edelberg. “None of these workarounds avoid the worst of the problem.”

Seeking to strike a reassuring tone despite days of negotiations, President Joe Biden said Thursday afternoon that he's had several "productive conversations" with House Speaker Kevin McCarthy and their teams are "making progress" on debt ceiling talks as the country inches closer to default.

"I've made it clear time and again: Defaulting on our national debt is not an option," Biden said as he delivered remarks in the Rose Garden before nominating a new chairman of the Joint Chiefs of Staff.

But an agreement still remains elusive with just seven days until potential default.

House members left town on Thursday for Memorial Day weekend but were told to be ready to return if a deal is reached.

"It is time for Congress to act now," Biden said in the Rose Garden. "I want to be clear: The negotiations we're having with Speaker McCarthy is about the outlines of what the budget will look like, not about default. It's about competing visions for America."

Leaving the Capitol later Thursday, McCarthy confirmed that there remains no deal in hand, having been "going back and forth" with the White House all day.

"The only way to move forward is with a bipartisan agreement," he said. "And I believe that we'll come to an agreement that allows us to move forward and that protects the hardworking Americans of this country.

"We've worked throughout the day, we'll continue to work to try to be able to solve the problem but there is no agreement," he said.

He said he would be working from Washington over the holiday weekend.

"I think there's a sense of understanding from both teams that we have serious issues still to work out and come to terms with and that's gonna take some time," Rep. Patrick McHenry of North Carolina, a key Republican negotiator, told reporters before heading into the speaker's office on Thursday. "That's all there is to it."

McHenry said then that work requirements on some federal aid were still a major sticking point.

Even if a debt ceiling deal is reached, Congress faces a serious time crunch to pass legislation before the end of the month. After a bill is drafted, McCarthy's pledging to give House members 72 hours to review it, a concession he offered to conservative hardliners roadblocking his speakership vote at the start of this year. Then the Senate will have to take up the bill before it goes to President Joe Biden's desk.

Complicating the matter further is the Memorial Day recess. The House will gavel out Thursday, and the Senate left town last week, though leadership in both chambers has directed lawmakers to be prepared to return to Washington immediately if a deal is struck.

Several Democrats have voiced frustration in recent days over the status of negotiation, with House Minority Leader Hakeem Jeffries, D-N.Y., dinging McCarthy's plans to adjourn and excoriating Republicans for, in his words, making "unreasonable demands."