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U.S. DEPARTMENT OF THE TREASURY
Remarks by Assistant Secretary for Financial Markets Joshua
Frost on the Historical and Current Perspectives on the Debt
Limit at the Federal Reserve Bank of New York’s Annual
Primary Dealers Meeting
December 1, 2022

As Prepared for Delivery
Good a�ernoon and thank you to the New York Fed for inviting me to talk with you today. Iʼm
delighted that circumstances permit our meeting in person again a�er these past few years
of virtual interaction. In my role as Assistant Secretary for Financial Markets at Treasury, one
of my main responsibilities is overseeing Treasuryʼs O�ice of Debt Management, which is the
policy team responsible for developing the marketable debt issuance strategy for the federal
government.
Between my current role at Treasury and my decades here at the New York Fed, Iʼve
developed a thorough appreciation for the role that the primary dealer community plays in
ensuring that the Treasury market remains the deepest and most liquid market in the world.
Your firms serve as critical conduits between Treasury and financial markets, as the only
group of market participants with an obligation to bid in each of the more than 380 auctions
that we conduct each year. Primary dealers also actively intermediate secondary market
trading and provide us with insights into the health of the Treasury market and feedback on
our issuance strategy.
One notable area where primary dealer feedback has historically been quite helpful is
evaluating the adverse e�ects that debt limit impasses impose on the primary and secondary
markets for Treasury securities. My remarks today are not going to include any speculation
on when the debt limit might next become binding, or when Congress may act. Rather, my
intention is to put the debt limit in context with a brief history, resolve some common
misconceptions, and describe some of the many negative outcomes that these impasses
produce. Unfortunately, debt limit episodes have become more frequent and consistently
prove to be counterproductive in achieving our objective to fund the government at the

lowest cost to the taxpayer over time.
Given the history of debt limit impasses over the last 40 years, it might come as a surprise
that the debt limit was originally intended to simplify the governmentʼs borrowing process.
Prior to World War I, Congress exerted tight control over federal debt management decisions
as individual bond issues were subject to legislative approval. This began to change with the
Second Liberty Bond Act of 1917 and then more so in 1939, when Congress consolidated
restrictions on specific types of debt into the aggregate limit that we have today. According to
the Congressional Research Service, the debt limit has been raised or suspended 61 times
since 1978, which works out to roughly once every 9 months.[1] Itʼs important to
acknowledge and reiterate that raising or suspending the debt limit does not authorize new
government spending. It simply permits Treasury to continue financing existing obligations
that Congresses and Presidents of both parties have incurred.
Most recently, Congress twice raised the debt limit in 2021: by $480 billion in October and
then by an additional $2.5 trillion in December. Increasing the debt limit by a specific dollar
amount was a common practice during the late 1990s and throughout the early 2000s but fell
out of favor a�er 2011. Instead, between 2013 and 2019, time-based suspensions of the limit
were Congressʼs preferred method for resolving a debt limit impasse. From a Treasury
perspective, the mechanics of an increase in the debt limit compared to a temporary
suspension of the limit di�er in one crucial respect: certainty on timing.
With a debt limit suspension, it is immediately apparent when the next impasse would begin
--- absent action from Congress prior to the end of the suspension --- because the end date of
the debt limit suspension is specified in the legislation. Conversely, when the debt limit is
instead increased by a fixed dollar amount, the date when the debt limit might again bind is
less certain, as it is dependent on the evolving fiscal picture.
Regardless, once the amount of outstanding debt subject to limit approaches its statutory
limit, there are certain extraordinary measures that the Treasury Secretary is authorized to
use to temporarily prevent the U.S. government from defaulting on its obligations. Iʼll
address the harm that taking those steps can cause later in my remarks.
With that as a backdrop, Iʼd like to first turn to few common misconceptions related to the
debt limit:

Misconception #1: There is no cost to repeatedly running up against the debt limit

As Iʼll explain shortly, there are real costs borne by taxpayers, including damage to the U.S.
economy and increases in funding costs.

Misconception #2: Treasury has absolute control over the issuance and redemption of its
debt
To begin to address this misconception, it is important to delineate the two broad categories
of debt subject to limit: marketable securities (the bills, notes, bonds, TIPS, and FRNs that we
auction) and nonmarketable securities. When our funding needs change, Treasury adjusts its
issuance of marketable securities. The amount of cash that needs to be raised is broadly
outside of Treasuryʼs control and is subject to considerable forecast uncertainties, because it
depends on the revenues and expenditures of the entire federal government. But Treasury is
responsible for determining how to meet those cash needs. We decide which securities to
issue, on which days, and in what amounts. The goal is to maintain our “regular and
predictable” issuance paradigm that lowers costs to the taxpayer over time.
However, the issuance and redemption of nonmarketable securities typically operate
di�erently. Some are driven by statute, such as investments in the Social Security Trust Fund,
with net issuance to trust funds increasing overall debt subject to limit. It is worth noting
here that Treasury does not determine the timing and magnitude of this issuance. In other
instances, issuance and redemption decisions are managed by federal agencies where
Treasury does not know with advance certainty how much, when, or what type of
nonmarketable debt an agency will choose to purchase or redeem. Shi�s in the amount,
timing, and type of this activity can meaningfully a�ect the contours of how the amount of
outstanding debt subject to limit evolves.
Finally, there are instances where external stakeholders control the amount of securities that
are issued, such as State and Local Government Series (SLGS) securities. In these specific
cases, external parties generally drive issuance and redemptions, but as an extraordinary
measure, Treasury can choose to close the window to new issuance, as we have done in the
past with SLGS.
In short, the issuance and redemption of nonmarketable securities are far more rigid, and
more driven by autonomous factors, than they are for marketable securities.

Misconception #3: There is a specific date known well in advance, referred to as the ʻx-date,ʼ
on which Treasuryʼs internal modal forecast says that the government will no longer be able

to meet its obligations because we will have entirely exhausted cash and extraordinary
measures
As professional forecasters are well aware, there is typically a probability distribution to
projections. Given the unacceptable risks associated with even the possibility of default, I
think that a useful definition for the ʻx-dateʼ is the date a�er which Treasury no longer
possess a high degree of confidence that it can continue to meet all of its obligations while
remaining under the debt limit. It is not the date when there is an equal likelihood that we
will or wonʼt be able to meet our payment obligations, nor is it the last conceivable date
when the government could run out of money. That said, as the level of all-in resources
continues to be exhausted, these dates tend to converge.
To put the aforementioned probability distribution into context, the federal governmentʼs
gross daily cash flow (excluding financing) has averaged nearly $50 billion throughout
FY2022, which equates to more than $12 trillion annually. This means that even a small
forecast miss in percentage terms can materially move the date by which Treasury would
exhaust its resources. If I were to evaluate the error bounds of our quarterly refunding
borrowing estimates since 1998, and exclude periods a�ected by the Great Recession or the
COVID pandemic, our current-quarter financing estimates (i.e., those looking out only the
next two months) have a 95% confidence interval of roughly $90 billion in both directions
when expressed in 2022 dollars. Thus, because of the very real possibility that fiscal flows
could deteriorate with little notice, the only reasonable, responsible approach is for Congress
to raise or suspend the debt limit before the date when we are no longer highly confident
that we will be able to continue to meet all of our obligations.
Additionally, it is not only the forecasted aggregate level of cash and extraordinary measures
that matters here, but also the distribution between these two components. For example,
unexpected shi�s in the fiscal forecast or net nonmarketable security issuance could require
Treasury to take unusual steps that we generally seek to avoid, like issuing same-day cash
management bills or conducting buybacks. These scenarios highlight that there are
instances in which Treasury might have enough resources to meet its obligations while
remaining under the debt limit, but would run an unacceptably high degree of execution risk.
Now, returning to the issue of the costs of repeatedly running up against the debt limit, first
consider the damage that these impasses can impose on the U.S. economy. In 2013, Treasury
published a report entitled “The Potential Macroeconomic E�ect of Debt Ceiling

Brinkmanship,” which used the 2011 impasse as a case study.[2] During those particularly
acrimonious debt limit negotiations, we witnessed a decline in household and business
confidence, a fall in household wealth as equity prices fell amid a spike in market volatility,
and wider credit and mortgage spreads. Each of these shocks contributed to a slowdown in
economic activity.
In addition to the direct economic e�ects, debt limit impasses tend to cause the federal
governmentʼs perceived creditworthiness to deteriorate and increase the governmentʼs
borrowing costs. For example, the political brinkmanship in 2011 was cited by S&P when it
downgraded the United Statesʼ sovereign credit rating from AAA. The GAO found that “delays
in raising the debt limit in 2011 led to an increase in Treasuryʼs borrowing costs of about $1.3
billion in fiscal year 2011.”[3]
Perhaps closer to home for this audience, debt limit impasses have also repeatedly disrupted
implementation of Treasuryʼs cash management policy – with knock-on e�ects for money
markets. As a reminder, Treasuryʼs policy is to maintain su�icient funds to cover at least our
one-week-ahead cash need, which includes both net fiscal outflows and the gross volume of
maturing marketable debt. This policy is a risk-management tool to protect against potential
interruptions to market access. However, during a debt limit impasse, it isnʼt always possible
to comply with this policy. For context, while our cash balance varies over time and has a
seasonal component, recently it has typically been between $600 billion and $700 billion
when debt limit constraints have not been binding. But as a debt limit impasse goes on, it
forces the cash balance closer and closer to zero. At the extreme, between early-October and
mid-December 2021, an examination of realized flows reported on the Daily Treasury
Statement indicates that there were several instances when we didnʼt have su�icient cash on
hand to meet even our next-day obligations.[4] During the course of that impasse, Secretary
Yellen wrote eight separate letters to Congress regarding the importance of acting to address
the debt limit.
Meanwhile, with respect to issuance, serving as a “regular and predictable” issuer has been a
longstanding hallmark of our borrowing strategy and lowers costs to the taxpayer over time.
In 2015, the Treasury Borrowing Advisory Committee (TBAC) estimated that applying this
paradigm had reduced interest costs by $27 billion since 1998.[5] Unfortunately, as we
maneuver to remain under the debt limit, the variability of our issuance increases and our
predictability decreases. Our longstanding practice is to rely on Treasury bills as an issuance
“shock absorber” because we believe that adjusting issuance in that sector (rather than in

coupons, TIPS, or FRNs) minimizes the broader e�ects on the market. However, that is not to
say that heightened variability in bill issuance is costless.
During a debt limit impasse, Treasury typically reduces bill issuance – at times, precipitously
– to remain under the debt limit. For example, during the final two months of the 2015
impasse, bill supply declined by $210 billion – a rapid and sizable drop that led to elevated
volatility in the primary and secondary markets.
Regrettably, variability in issuance doesnʼt immediately subside once the debt limit has been
resolved. At that point, Treasury must rapidly replenish its cash balance for risk-management
purposes. During those periods, we again see elevated volatility in the primary and
secondary markets for bills.
Outside of these direct disruptions to supply, bouts of debt limit-induced volatility may also
have a deleterious e�ect on the resilience of this globally important market. The resilience of
the Treasury market is a top priority of the Financial Stability Oversight Council for good
reason – a healthy Treasury market is essential for a strong U.S. economy, stable global
financial system, and the dollar.
In summary, debt limit impasses inject additional uncertainty into financial markets:
uncertainty about when the debt limit will be reached; uncertainty about how long
extraordinary measures will permit Treasury to continue to satisfy the governmentʼs
obligations; and uncertainty about the timing and pace of changes in Treasury securities
issuance. As market participants have repeatedly highlighted, markets do not like
uncertainty and will demand a risk premium to hold Treasury debt as compensation. This
undermines Treasuryʼs e�orts to finance the government at the lowest cost to the taxpayer
over time.
Finally, as Secretary Yellen noted last year: “A delay that calls into question the federal
governmentʼs ability to meet all its obligations would likely cause irreparable damage to the
U.S. economy and global financial markets.”[6] Ultimately, the only solution is for Congress to
address the debt limit.
Thank you, all, again for the invaluable feedback you provide as we face these periodic
challenges.
[1] Votes on Measures to Adjust the Statutory Debt Limit, 1978 to Present, Congressional Research Service, updated January
6, 2022 (https://crsreports.congress.gov/product/pdf/R/R41814)

[2] Report: The Potential Macroeconomic E�ect of Debt Ceiling Brinkmanship, U.S. Department of the Treasury, October 3,
2013 (https://home.treasury.gov/news/press-releases/jl2178)
[3] Debt Limit: Analysis of 2011-2012 Actions Taken and E�ect of Delayed Increase on Borrowing Costs, GAO, July 2012
(https://www.gao.gov/assets/gao-12-701.pdf

)

[4] Treasury was wholly reliant on being able to settle previously auctioned securities successfully.
[5] Treasury Borrowing Advisory Committee (TBAC) Discussion Charts, August 2015 (https://home.treasury.gov/system/files
/276/August2015TreasuryPresentationToTBAC.pdf

)

[6] Secretary Yellen Sends Debt Limit Letter to Congress (9/08/21) (https://home.treasury.gov/system/files/136/Debt-LimitLetter-to-Congress_20210908_FINAL-Pelosi.pdf

)