Extraordinary measures

What Are Extraordinary Measures?

Extraordinary measures refer to temporary accounting and financing maneuvers undertaken by governments or central banks to maintain critical operations or financial system functioning during periods of severe stress or when faced with statutory limitations. In the context of U.S. financial policy, the term most commonly describes actions taken by the U.S. Treasury Department to avoid breaching the debt limit when federal borrowing approaches its statutory cap. These actions fall under the broader umbrella of macroeconomic policy, as they directly impact the government's ability to manage its finances and the overall economy.

When the U.S. government approaches its borrowing limit, the Treasury Secretary can deploy extraordinary measures to create "headroom" under the debt limit, allowing the government to continue meeting its financial obligations, such as paying federal employees, Social Security beneficiaries, and bondholders, without defaulting. These measures are accounting tools, not a source of new revenue, and are designed to buy time for Congress to raise or suspend the debt ceiling.

History and Origin

The concept of extraordinary measures by the U.S. Treasury largely arose as a workaround to the statutory debt limit, a legislative constraint on the total amount of money the federal government can borrow. Established in 1917, the debt ceiling was intended to give Congress more control over federal borrowing. However, as federal spending often outpaces revenue, leading to a budget deficit, the government frequently finds itself nearing this limit.

Extraordinary measures have been employed regularly in recent decades to avert a potential default. For instance, in January 2023, the U.S. Treasury Secretary, Janet Yellen, notified Congress of the need to implement extraordinary measures as the U.S. approached its then-statutory debt limit of $31.4 trillion, detailing the specific actions to be taken.¹⁸ These actions have historically provided several weeks to months of additional borrowing capacity.¹⁷ The use of such measures underscores the political and economic implications of the debt ceiling, as they delay but do not resolve the underlying need for legislative action on government borrowing.

Beyond debt limit impasses, the term "extraordinary measures" can also describe unprecedented actions taken by central banks, such as the Federal Reserve, during periods of severe financial crisis to stabilize markets and economies. During the 2008 global financial crisis, the Federal Reserve undertook "unprecedented" interventions, including expanding lending programs and adopting non-conventional monetary policy tools like large-scale asset purchases (commonly known as quantitative easing).¹⁶ Similarly, the International Monetary Fund (IMF) has referred to its own significant interventions during global economic downturns as "extraordinary" steps to provide financial support and prevent liquidity pressures from turning into solvency problems.¹⁵

Key Takeaways

• Extraordinary measures are temporary accounting maneuvers used by the U.S. Treasury to prevent a default on government obligations when the debt limit is reached.
• These measures buy time for Congress to raise or suspend the debt limit, avoiding disruptions to federal payments.
• Common extraordinary measures involve suspending investments in certain government retirement funds or halting reinvestment of specific government-held funds.
• The term can also refer to exceptional interventions by central banks (like the Federal Reserve) or international financial institutions (like the IMF) during severe economic or financial crises.
• While effective in the short term, extraordinary measures are not a long-term solution to fundamental fiscal or economic challenges.

Formula and Calculation

Extraordinary measures taken by the U.S. Treasury do not involve a specific financial formula in the traditional sense, as they are primarily accounting adjustments rather than calculations based on market variables. Instead, they involve freeing up existing borrowing capacity under the debt limit by temporarily altering the investment practices of certain government funds.

For example, two key extraordinary measures include:

• Suspending reinvestment of the Government Securities Investment Fund (G Fund): The G Fund, part of the Thrift Savings Plan for federal employees, is invested daily in special-issue Treasury securities that count against the debt limit. By suspending this daily reinvestment, the Treasury creates temporary borrowing capacity. The amount of headroom gained depends on the daily cash flows into the G Fund.¹⁴
• Redeeming existing, and suspending new, investments of the Civil Service Retirement and Disability Fund (CSRDF) and the Postal Service Retiree Health Benefits Fund (PSRHBF): These funds are also invested in special-issue Treasury securities. The Treasury Secretary can declare a "debt issuance suspension period," allowing for the suspension of new investments and the redemption of certain existing investments, thereby creating additional headroom under the debt limit.¹³

The "headroom" created by these extraordinary measures is an estimate, typically provided by the Treasury, of how much additional borrowing capacity is gained and for how long it is expected to last. This duration is influenced by factors such as the government's cash balance and the pace of federal expenditures.¹²

Interpreting Extraordinary Measures

Interpreting extraordinary measures primarily involves understanding their purpose and limitations within the broader context of fiscal policy and economic stability. When the U.S. Treasury announces the implementation of extraordinary measures, it signals that the federal government is nearing its statutory debt limit and that a legislative resolution is needed. The duration for which these measures can sustain government operations (the "headroom") provides an estimated timeline for Congress to act.

For investors and market participants, the invocation of extraordinary measures indicates increased political risk surrounding government solvency, though a U.S. default has never occurred. While these measures prevent immediate default, they highlight potential disruptions to government payments and raise concerns about the creditworthiness of government debt, which can impact interest rates and investor confidence in capital markets. The market typically views the use of extraordinary measures as a temporary bridge, not a permanent solution, underscoring the urgency for lawmakers to address the underlying debt ceiling issue.

Hypothetical Example

Imagine the U.S. federal government's total outstanding debt is $X trillion, and the statutory debt limit is also set at $X trillion. With daily government expenditures continuing, the Treasury Department anticipates breaching this limit within days or weeks. To avoid an immediate default on its obligations, the Treasury Secretary announces the deployment of extraordinary measures.

One such measure might be to temporarily suspend the daily reinvestment of the Government Securities Investment Fund (G Fund). If the G Fund typically receives and reinvests $10 billion in Treasury securities each day, suspending this reinvestment for a period effectively frees up that $10 billion in borrowing capacity under the debt limit each day. Over several weeks, this could create hundreds of billions of dollars in temporary headroom, allowing the government to continue paying its bills, such as salaries for federal employees or Social Security payments, while Congress debates raising the debt ceiling. Once the debt limit is raised or suspended, the Treasury is obligated to make these affected funds whole, restoring any lost earnings.

Practical Applications

Extraordinary measures are primarily a tool used by governments and, in a broader sense, by central banks or international financial institutions to navigate severe fiscal or economic crises.

1. U.S. Debt Limit Management: The most common application in the U.S. is the Treasury Department's use of extraordinary measures to avoid breaching the debt limit. This allows the government to continue funding its operations, including essential services and debt payments, until Congress takes action to raise or suspend the limit.¹¹
2. Financial Crisis Response: In times of acute financial crisis, central banks like the Federal Reserve may implement extraordinary measures to provide emergency liquidity to financial institutions, prevent systemic collapse, and stabilize markets. Examples include large-scale asset purchases (quantitative easing) or new lending facilities to support specific market segments. These interventions aim to restore financial stability and prevent a deeper economic recession.¹⁰ The Federal Reserve's actions during the 2008 financial crisis, for instance, involved "unprecedented" steps to shore up liquidity.⁹
3. International Economic Support: International organizations, such as the International Monetary Fund (IMF), deploy extraordinary measures in response to global or regional economic crises affecting member countries. This can involve providing substantial financial assistance packages to countries facing severe balance-of-payments problems or external shocks, helping them to stabilize their economies and implement necessary policy adjustments.⁸ During the COVID-19 pandemic, the IMF initiated an "unprecedented" level of financial assistance to help countries cope with the economic fallout.⁷

Limitations and Criticisms

While extraordinary measures serve as critical tools for crisis management, they come with inherent limitations and face various criticisms.

For U.S. Treasury extraordinary measures related to the debt limit, the primary limitation is their temporary nature. They only delay the inevitable need for Congress to address the statutory borrowing cap. If a political agreement isn't reached, even these measures will eventually be exhausted, leading to a potential government default. Such a default could have severe implications for the U.S. economy and global financial markets. Furthermore, suspending investments in federal employee retirement funds, even temporarily with subsequent restoration, can raise concerns about the integrity and management of these vital public funds.

When applied to central bank actions, "extraordinary measures," often synonymous with unconventional monetary policy, also face scrutiny. Critics argue that prolonged reliance on such measures, like quantitative easing and near-zero interest rates, can lead to several adverse outcomes:

• Distortions and Asset Bubbles: Maintaining ultra-low interest rates or injecting massive liquidity into the system may contribute to an under-pricing of risk, fostering the formation of asset price bubbles and a disconnect between financial markets and the real economy.⁶
• Moral Hazard: Repeated interventions might create a perception that large institutions will always be bailed out, potentially encouraging excessive risk-taking.
• Ineffectiveness beyond Crises: Some argue that, beyond immediate crisis periods, extraordinary monetary measures do little to stimulate long-term economic activity and carry significant macroeconomic risks.⁵
• Wealth Inequality: Large-scale asset purchases by central banks can disproportionately benefit wealthier households, potentially exacerbating wealth inequality.⁴
• Central Bank Credibility: Prolonged unconventional measures might undermine the credibility of central banks if they are perceived as monetizing government debt or supporting a weak financial system rather than focusing on price stability and employment.³ The United Nations has even warned that current central bank rate increases, which reverse some of these extraordinary measures, risk tipping the world into a global recession.²

Extraordinary Measures vs. Unconventional Monetary Policy

While both "extraordinary measures" and "unconventional monetary policy" refer to non-standard actions in financial policy, they typically apply to different actors and situations, though with some conceptual overlap.

Extraordinary Measures (U.S. Treasury Context): These are specific, temporary accounting actions undertaken by the U.S. Treasury Department to manage the national debt and avoid breaching the statutory debt limit. Their sole purpose in this context is to create temporary borrowing capacity, allowing the government to continue paying its bills when Congress has not yet raised or suspended the debt ceiling. They are distinct from policies aimed at influencing overall economic conditions.

Unconventional Monetary Policy: This refers to policies implemented by central banks, such as the Federal Reserve, typically when traditional monetary policy tools (like adjusting the federal funds rate) are no longer effective, often due to interest rates hitting the zero lower bound. These measures, like quantitative easing (large-scale asset purchases) or forward guidance, are designed to stimulate the economy, increase liquidity, lower long-term interest rates, and promote financial stability during an economic recession or severe crisis. While they can be "extraordinary" in their nature, their goal is macroeconomic management rather than solely debt limit avoidance.

In summary, the U.S. Treasury's extraordinary measures are a specific administrative response to a statutory borrowing constraint, whereas unconventional monetary policy refers to a broader set of tools used by central banks to influence the economy, often in response to a deep recession or financial market dysfunction.

FAQs

What happens if extraordinary measures run out?

If extraordinary measures implemented by the U.S. Treasury are exhausted and Congress does not raise or suspend the debt limit, the U.S. government would be unable to borrow new funds or pay all its obligations. This would lead to a default on some payments, potentially including principal and interest rates on Treasury securities, Social Security benefits, or salaries for federal employees. Such an event could trigger a severe financial crisis and significant economic disruption.

Are extraordinary measures legal?

Yes, the extraordinary measures used by the U.S. Treasury are authorized by statute, specifically under provisions related to certain government retirement funds. The Treasury Secretary has the legal authority to implement these actions to manage federal finances in the face of a binding debt limit.

How long do extraordinary measures typically last?

The duration for which extraordinary measures can sustain government operations varies depending on the government's cash flow, the size of the budget deficit, and the specific measures employed. Historically, they have delayed the point of potential default by periods ranging from a few weeks to several months, providing a window for Congress to act.¹