Janet Yellen, U.S. Treasury Secretary, testifies before Senate Appropriations Subcommittee on Financial Services, about the FY22 Treasury budget request on Capitol Hill in Washington, DC on June 23, 2021.After a two year suspension of the debt ceiling at the end July, the Treasury Department will start taking emergency cash-conservation measures Monday. This is to prevent the federal borrowing limit from being busted.Economists believe that Treasury will be able to pay its bills through these so-called extraordinary actions, without allowing it to issue new debt. This could take two to three months. The borrowing limit will be raised or suspended by Congress, or the U.S. could default on its obligations.This limit has been a part of American politics for more than a century. It prevents Treasury from issuing new bonds to finance government activities after a certain level of debt is reached. This level was $22 trillion at the end of August 2019, and was temporarily suspended on Saturday.Washington's new debt limit will also include any additional borrowing from summer 2019 In July, the Congressional Budget Office predicted that the new limit would be just above $28.5 trillion.Economists believe that even though the federal government has never defaulted on its obligations, such an event would have devastating effects on the U.S. economic system by increasing interest rates.Karen Dynan, an economist at Harvard University, stated that the government must have sufficient funds to pay interest. If it stopped paying interest, it could cause financial markets to be very disturbed," Karen Dynan, a Harvard University economist, told CNBC.These funds are necessary to pay government workers and mail out Social Security checks. Dynan, a Treasury official under the Obama administration, stated that these funds are essential. People depend on this money and could be in serious financial trouble if it isn't received as planned.However, politicians have used the debt ceiling over the years as a political tool despite the near certainty of economic disaster.In exchange for raising the debt limit, Republicans used the fear of default to gain spending cuts and other policy priorities from Obama's administration.Dynan agreed with the consensus view that Democrats have marginal control in the Senate and House of Representatives, but he wasn't worried about a compromise.Although the Treasury Department declined comment, it referred CNBC and Nancy Pelosi to a recent letter that Secretary Janet Yellen sent to House Speaker Nancy Pelosi (D-Calif).Pelosi was impressed by Yellen's message that trillions of dollars in federal spending and Covid Relief laws had made it harder to predict how Treasury would be able sustain these extraordinary measures.The Treasury secretary stated that "the time extraordinary measures will last is subject to considerable uncertainty because of a variety of factors including the challenges of forecasting payments and receipts by the U.S. government months in the future, exacerbated with the heightened uncertainty of payments and receipts related the economic impact from the pandemic."These extraordinary measures enable the Treasury to redeem investments in federal pension programs and to halt new ones to generate cash, without increasing the overall debt. There is no backup if these methods fail.Without new Treasury bonds being issued by the government, payments for Social Security, Medicare and military spending will stop.Chief economist at Stifel, Lindsey Piegza, stated that unusual measures are not new or cause for alarm immediately.She stated that "we've already implemented extraordinary measures before, so this isn’t much of an issue from a procedural perspective," to CNBC last week.She added that "The implication is a further showdown Washington eroding American's trust in a cohesive and functioning government." "It also highlights infighting between policy officials, which will make it harder for both sides to agree on anything from infrastructure to spending to the debt ceiling."Although economists are optimistic about a suspension in the future, Washington has a more complex calculus.The White House has almost completely gotten rid of the debt-ceiling mess."It is Congress’s responsibility to raise the debt limit or suspend it in order to pay the spending it authorized over the years," stated a White House official, speaking under anonymity to discuss ongoing negotiations.Few politicians in Congress want to be accused of endorsing a ballooning federal debt 15-months before an election.This year, it is complicated by the fact that both parties have members of Congress eager to reach a compromise on a trillion dollar infrastructure deal.A $3.5 trillion domestic spending bill is also planned by Democrats.Pelosi must get enough votes to pass a debt ceiling suspension or hike. She also needs to protect her razor-thin majority.CNBC was informed by an aide to the House Democratic leadership that discussions are ongoing about the ceiling and that top members of the party will not put at risk the full faith, credit and integrity of the United States.The aide didn't say what path Congress would take.
