On Saturday, United States Treasury Secretary Janet Yellen issued a dire warning over the potential consequences which will occur if the US fails to raise its statutory debt ceiling in the coming months. Should the country fail to do so, she warned the nation could end up defaulting on its debt by the summer, which would lead to a massive financial crisis.
In an interview with Axios news outlet, she said, “It makes me nervous…It would be devastating. It’s a catastrophe… we’ll have a financial crisis and I believe we would have recession in the United States.”
She added, “Spending would have to decline to match the tax revenues,” and that would remove the ability of the government to support economic growth with stimulus measures. She went on to point out, that would produce “psychological consequences” which would cause people to stop spending and horde money, which would then “further impact spending and deepen a recession.”
In addition, she said, if the US openly defaulted, the ripple effects from that would spread across the entire global economy.
She said, “Americans would face higher borrowing costs, and it would cause a good deal of turmoil globally as well.”
Secretary Yellen has been raising the alarm over a potential US debt default for a month now, warning the US Congress that the Treasury began invoking emergency measures to prevent the nation from reaching the debt ceiling, which at present is set at $31.4 trillion.
The measures used mostly involve deferring payments which are not immediately necessary, to give the Treasury breathing room, and delay the date when the government reaches the limit on its ability to spend.
When Yellen notified Congress, she included a warning that the actions would only buy additional time for Congress to hammer out an agreement on raising the debt ceiling, and that the most likely date the measures would be effective until was early June. However had Treasury not implemented the measures, she noted we would have reached the limit imminently.
In her interview with Axios, she said, “The president and the leadership of Congress are responsible to find a way to get the debt ceiling raised.”
First enacted by Congress in 1917, the US debt ceiling is designed to prevent the US government from issuing government bonds to fund the operation of the government once the debt ceiling is reached. If the government exceeds the limit, it will risk being unable to make normal budget payments, and fund social programs. Even more seriously, its ability to make payments on debts already incurred is put at risk, which could cause the government to default on its debts.
