Treasury Could Run Out of Cash in December: CBO

Treasury Could Run Out of Cash in December: CBO

By Yuval Rosenberg and Michael Rainey
Tuesday, November 30, 2021
It’s only Tuesday. In this case, though, that might be a good thing since it means lawmakers still have a bit more time to deal with that daunting to-do list we told you about yesterday. They haven’t gotten off to a good start, though, as the annual defense bill has stalled in the Senate.

Here’s what else is going on.

Treasury Could Run Out of Cash in December: CBO

Lawmakers don't have much time to avoid a U.S. debt default — and the deep recession that could follow.

Echoing recent warnings from Treasury Secretary Janet Yellen, the Congressional Budget Office said Tuesday that the U.S. Treasury faces the risk of default in a matter of weeks if Congress fails to raise or suspend the federal debt ceiling.

The Treasury has already bumped up against the current debt limit of $28.9 trillion and is taking what it calls extraordinary measures to continue to meet the country’s financial obligations. As required by the infrastructure legislation recently signed into law, the Treasury must make a payment of $118 billion to the Highway Trust Fund by December 15, CBO noted, and that payment could soon force the Treasury to delay or default on other payment.

“If the debt limit remained unchanged and if the Treasury made that transfer in full, the government’s ability to borrow using extraordinary measures would be exhausted soon after it made the transfer,” the CBO said. “In that case, the Treasury would most likely run out of cash before the end of December.”

Yellen warns again: Appearing before the Senate Banking Committee on Tuesday, Yellen said that while the economic recovery from the Covid-19 crisis is “on track,” failing to raise the debt limit could be disastrous.

“I cannot overstate how critical it is that Congress address this issue. America must pay its bills on time and in full. If we do not, we will eviscerate our current recovery,” Yellen said in prepared remarks. “In a matter of days, the majority of Americans would suffer financial pain as critical payments, like Social Security checks and military paychecks, would not reach their bank accounts, and that would likely be followed by a deep recession.”

Talks in the Senate: The main obstacle to dealing quickly with the debt ceiling is the block of Republicans in the Senate, who have vowed to filibuster any attempt by Democrats to raise the limit on their own. Instead, Republicans want Democrats to use the reconciliation process to raise the limit, which Democrats says is just a strategy to eat up valuable floor time while generating plenty of material for negative GOP ads to be used in the 2022 midterm elections.

Although Senate Minority Leader Mitch McConnell (R-KY) has taken a hard line on the matter in the past, his position may be softening. Punchbowl News reports that McConnell seemed less confrontational when discussing the debt ceiling on Monday. “We’re still talking about that,” McConnell said when asked about his recent conversations with Senate Majority Leader Chuck Schumer (D-NY) on the issue.

Schumer also spoke in relatively positive terms, saying he had a “good conversation” with McConnell about raising the debt ceiling. “The talks between Schumer and McConnell are a notable shift from October, where the two regularly traded fire as they dug into their positions,” said The Hill’s Jordain Carney.

One possible compromise: An option that appears to be gaining momentum is for Democrats to raise the debt ceiling in a standalone reconciliation bill, Punchbowl reports, with Republicans agreeing to limit their delaying tactics and messaging votes. All 50 Republican senators would have to agree to that approach, however, and it’s not clear that McConnell can produce that level of cooperation.

One notable Republican is pushing hard against any cooperation on the matter. Former President Donald Trump released a statement Tuesday calling on Republican senators to use the debt ceiling to wage war on the Democrats’ agenda.

“Old Crow Mitch McConnell, who is getting beaten on every front by the Radical Left Democrats since giving them a two-month delay which allowed them to 'get their act together,' must be fully prepared to use the DEBT CEILING in order to totally kill the Democrat’s new Social Spending (Wasting!) Bill, which will change our Country forever,” Trump said.

“Use the Debt Ceiling, Mitch, show strength and courage,” Trump added. “Our Country is being destroyed.”

Quote of the Day: Fed May Withdraw Pandemic Support ‘a Few Months Sooner’

“At this point, the economy is very strong, and inflationary pressures are high and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at the November meeting, perhaps a few months sooner.”

– Federal Reserve Chairman Jerome Powell, indicating in testimony before the Senate Banking Committee on Tuesday that the central bank may speed up its plan to withdraw the economic support it has been providing via $120 billion in monthly purchases of Treasury bonds and mortgage-backed securities.

Powell said that the threat of persistently higher inflation has grown and that the price gains seen recently are now likely to linger at least into the middle of next year. He noted, though, that Fed policymakers will be monitoring new labor market and inflation data as well as updates about the omicron variant before their next meeting, scheduled for December 14 and 15.

Earlier this month, Powell stressed that Fed tapering should not be interpreted as a signal that interest rate hikes will quickly follow, saying that the central bank still wanted to see the labor market heal further. Still, the prospect that the Fed may act more aggressively than previously indicated as it focuses more closely on fighting inflation — combined with growing concern about the omicron variant — was enough to rattle markets again Tuesday. Major stock indexes fell close to 2% on the day, and market expectations for an accelerated pace of Fed rate hikes jumped.

Biden Officials Studying Whether More Money Will Be Needed to Fight Omicron Variant: Report

The White House Office of Management and Budget and other Biden administration officials are looking into how much funding they have available to redirect to respond to needs that may arise as a result of the new omicron variant of the coronavirus, The Washington Post reports:

“Over at the White House, officials were working to understand their options but so far do not believe there is a need for an imminent request to Congress for more money. But that could change in coming days, the officials said, as much of the funding already approved for the White House to respond to the pandemic has been earmarked for specific purposes, such as free testing for uninsured Americans. White House officials are looking at how much money they would need in a worst-case scenario, in case the administration needs to immediately purchase mass quantities of vaccines designed to immunize specifically against the new variant.
“The cost of updated vaccines for all Americans could run as high as $7.5 billion, while buying 2 million additional monoclonal antibody treatments could cost $4 billion, according to one senior administration official, who provided rough estimates. Another $5 billion for 10 million antiviral pills could bring the total to $16 billion, the administration official said.”

The bottom line: Any White House push for a new round of emergency funding could lead to some political sparring and debate about what existing funding to shift toward omicron response, but G. William Hoagland, a budget expert with the Bipartisan Policy Center, told the Post that Congress would likely move quickly and avoid messy fights if it becomes clear that more money is needed. “I think it’s far too early to determine ‘what is needed for omicron,’ but given our history if this becomes an issue I doubt there’s any question that the resources will be there,” he said. “I don’t see a domestic political fight happening over omicron.”

Chart of the Day: Surging Corporate Profits

Over the last two quarters, U.S. non-financial businesses have posted the largest profit margins since 1950, according to Bloomberg News. Those results indicate that the economy is strong and that inflation isn’t yet a threat to the recovery, Robert C. King, director of research at the Jerome Levy Forecasting Center, told Bloomberg.

The record profits also suggest that complaints from business owners and executives about the soaring cost of labor and materials need to be taken with a grain of salt. While individual firms may struggle to provide higher pay, “businesses in the aggregate can safely say that when they spend more money on workers, that’s going to be a situation where there is more revenue coming back to them” as workers spend their paychecks, King said.

Still, the race between higher costs and higher profits isn’t over. Over the past year and a half, worker incomes have been boosted by fiscal policies that provided an increase in aggregate income and a big jump in savings during the Covid-19 crisis, but many of those policies have come to an end, which could cool consumer spending. And if the Federal Reserve takes steps to reduce inflation by raising interest rates, the surge in both incomes and profits could come to a screeching halt while producing a new round of conflict between worker demands for higher pay and business efforts to maintain fat profit margins.

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