Why Kevin McCarthy's Debt Ceiling Showdown Will Start Sooner Than You Might Think

The Republican controlled House of Representatives threatens to risk the faith and credit of the U.S. as it engages in controversy over paying bills already incurred.

As the nation braces itself for a widely predicted recession in 2023, the new House of Representatives, with Speaker Kevin McCarthy, R-Calif., has Wall Street worried. 

The source of concern is the debate about the debt ceiling, and how it will be approached in the newly installed Republican House of Representatives. The issue is plain to see, but the politics of it are wildly complicated.

Any political calculations based on appealing to voters' appetite for firing away at the government could end up putting the economy at risk. 

So much so, that Treasury Secretary Janet Yellen felt compelled to issue a statement she addressed to McCarthy.  

In the publicly available letter, she spelled out the math.

"Public Law 117-73 increased the statutory debt limit to approximately $31.381 trillion on December 16, 2021," she wrote to McCarthy.  "As you know, the debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments."

Yellen Puts a Stake in the Ground

It's a simply factual, but extraordinary statement, and then she mentions the upcoming date that looks like it's happening in the very soon future.

"I am writing to inform you that beginning on Thursday, January 19, 2023, the outstanding debt of the United States is projected to reach the statutory limit," she writes. "Once the limit is reached, Treasury will need to start taking certain extraordinary measures to prevent the United States from defaulting on its obligations."

It looks like the executive branch is attempting to find ways to counter Republicans and their hunger to satisfy their voter base.

So What Might Be the Ramifications?

Failing to increase the debt limit would have serious consequences. The government would, in essence, default on its legal obligations. That would put the U.S. in a situation where it would not be trusted by the international banking system.

And that would have catastrophic effects on not just the U.S. economy, but it could have world-wide implications. 

Yellen explained in her letter the dire need to take steps to avoid such a calamity, and discusses the limits of what the Treasury Department can do about it.

"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," she writes. "While Treasury is not currently able to provide an estimate of how long extraordinary measures will enable us to continue to pay the government’s obligations, it is unlikely that cash and extraordinary measures will be exhausted before early June. Consistent with past practice, I will, of course, continue to keep Congress informed as we approach the exhaustion of our resources."

The prospect of the U.S. government unable to pay its debts might seem absurd. But it was very close to happening during the Obama administration. It's not crazy to start thinking about this now. Like it or not, it's a debate that is happening starting for real on Thursday, Jan. 19.