How does the US government manage debt?

The U.S. government manages its debt through several mechanisms, primarily involving the Treasury Department and the Office of Management and Budget (OMB). Here are the key points:

1. Debt Ceiling: The U.S. has a statutory limit on the amount of debt it can incur, known as the debt ceiling. When the national debt approaches this ceiling, Congress must raise it to prevent the government from defaulting on its obligations. Failure to raise the ceiling means the government would not have sufficient funds to cover all its payments, including interest on debt and other federal obligations like Social Security payments, federal employee salaries, and payments to contractors 1.

2. Cash and Debt Management Plans: The Treasury and OMB manage the government's fiscal operations through detailed cash and debt management plans. These plans ensure that there is sufficient cash flow to meet debt obligations and other governmental expenditures. However, when the debt ceiling is reached, they have to resort to extraordinary measures to maneuver around the constraints until the ceiling is raised 1.

3. Financial Repression: Another aspect involves financial regulations that effectively mandate certain investors, such as banks, to hold government debt. This is often referred to as financial repression. For example, capital rules and the supplementary leverage ratio can lead banks to buy large amounts of government bonds. While this creates a steady demand for government securities, it poses risks, especially if those banks become overexposed to government debt, potentially leading to financial instability similar to the problems seen with Silicon Valley Bank 2.

These methods underscore a complex balancing act in ensuring the government can meet its financial obligations while managing the risks associated with high levels of public debt.