In 1917 a debt limit was established for WWI Liberty Bonds. The Treasury was allowed to issue Liberty Bonds up to a limit without asking for Congressional approval. This streamlined wartime financing. In 1939, an overall debt limit was established.
According to the Bipartisan Policy Center, since the debt limit was established it has been raised 44 times under Republican presidents and 39 times under Democratic presidents. Congresses with Democratic and Republican majorities have authorized these increases, both when their party controlled the White House and when it did not.
The Treasury issues two kinds of debt. The Treasury issues debt to the public – called marketable debt – and debt to other government agencies – called nonmarketable debt. Borrowing from the public means selling Treasury securities to domestic households, businesses, the Federal Reserve, and foreigners. Debt issued to other government agencies is known as intra-governmental debt. Government agencies buy Treasury securities, sending the Treasury cash to fund operations.
In 2015, the debt ceiling was suspended through March 15, 2017. The federal government must suspend or raise the debt ceiling to continue operations. When the federal government hits the debt ceiling, the Treasury uses extraordinary measures to keep the lights on. Extraordinary measures allow the Treasury to borrow more money, here’s how.
Extraordinary measures allow the Treasury to reduce the amount of intra-governmental debt in specific federal agencies. By reducing intra-governmental debt, the total debt falls below the debt ceiling. Extraordinary measures target three large holders of intra-governmental debt. The Government Securities Investment Fund of the Thrift Savings Plan (G Fund), the Civil Service Retirement and Disability Fund, and the Exchange Stabilization Fund.
The G Fund is savings plan for federal employees. The Civil Service Retirement and Disability Fund is the largest federal pension fund. The Exchange Stabilization Fund is used to stabilization financial markets in the event of a crisis.
When the debt ceiling is reached, the Secretary of the Treasury is allowed to declare an extraordinary measure known as a debt issuance suspension. The debt issuance suspension lets the Treasury temporarily redeem existing Treasury securities held by government pension funds. The Treasury must reinstate the Treasury securities to the government pension fund when the debt ceiling is raised.
By temporarily reducing intra-governmental debt held in government pension funds, the total debt balance falls below the ceiling. The Treasury can again borrow up to the debt ceiling. However, extraordinary measures can only go on for so long.
The Congressional Budget Office projects that the Treasury will exhaust extraordinary measures by the fall. In the short run the federal government needs to suspend or raise the debt ceiling to avoid a default. A default would cause unpredictable turbulence in financial markets. In the long run the federal government needs to reduce the deficit and shrink the national debt.
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