Treasury Secretary Janet Yellen on Tuesday warned of an “economic and financial catastrophe” that would decimate jobs and make loans more expensive for years to come if Congress fails to raise the debt ceiling and the government defaults on its obligations.
Yellen issued the warning in prepared remarks for the 51st annual Sacramento Metro Chamber’s annual Capitol-to-Capitol program, a meeting with California business executives.
The Treasury Secretary touched on the U.S. economic recovery from the lows of the pandemic recession, while acknowledging that inflation remains an ongoing problem.
“We still face near-term challenges. Our administration’s top economic priority is to tackle inflation while protecting the economic gains of the past two years,” she said, noting that inflation remains elevated, although it has come down several percentage points from the summer peak.
Yellen then turned to an issue that she said “could threaten all the progress” of the past two years: the debt-ceiling standoff.
The United States bumped up against its $31.4 trillion debt ceiling in January, leaving it to a politically divided Congress to raise the cap and allow the government to keep paying its bills.
Democrats have insisted on a legislative measure with no preconditions to raise the debt ceiling, while Republicans have demanded spending cuts in exchange for their support to lift the borrowing cap.
Yellen said it was a “basic responsibility” of Congress to raise or abolish the $31.4 trillion borrowing cap, warning that a default on the country’s debt would lead to an “economic and financial catastrophe.”
“A default would raise the cost of borrowing into perpetuity. Future investments would become substantially more costly,” she said.
In the event of a default, American businesses would face deteriorating credit markets while the government would probably be unable to issue payments to military families and seniors who rely on Social Security, she warned.
“This economic catastrophe is preventable,” Yellen continued. “Congress must vote to raise or suspend the debt limit. It should do so without conditions. And it should not wait until the last minute.”
President Joe Biden has, in similar terms as Yellen, insisted on an unconditional lift of the debt cap.
Republicans, on the other hand, have been seeking to tie spending cuts in exchange for their support to raise the borrowing limit.
As a basis for negotiations, House Republicans last week introduced legislation to raise the debt ceiling by $1.5 trillion while laying out a series of spending cuts amounting to roughly $4.5 trillion.
Biden has rejected the proposal, claiming the GOP proposal is “not about fiscal discipline” but about “finding ways to squeeze out more of America’s middle class.”
GOP Debt-Ceiling Plan
Called the Limit, Save, Grow Act of 2023, the Republicans’ 320-page bill calls for returning discretionary spending to 2022 levels, capping spending growth to 1 percent per year, and repealing certain tax credits.
The plan would also cancel Biden’s student loan forgiveness program, take back unspent COVID-19 relief funds, remove barriers to increased domestic energy production, and reimpose work requirements for many people collecting welfare.
“If Washington wants to spend more, it will have to come together and find savings elsewhere, just like every household in America,” House Speaker Kevin McCarthy (R-Calif.) said on the House floor last week.
“President Biden has a choice. Come to the table and stop playing partisan political games, or cover his ears, refuse to negotiate, and risk bumbling his way into the first default in our nation’s history,” McCarthy added.
The proposal was met with a sharply critical reaction by the White House, with Press Secretary Karine Jean-Pierre calling it a “blueprint to devastate hard-working American families” and accusing Republicans of “holding the American economy hostage.”
The plan proposed by Republicans would decrease Congress-approved annual spending to $1.47 trillion and cap growth at 1 percent annually over the next 10 years, effectively acting as a spending cut. The caps would not apply to benefit programs such as Social Security and Medicare, however.
The plan would also cancel the remaining money from the $5.2 trillion in COVID-19 relief programs Congress approved between 2020 and 2022. According to the White House, less than $80 billion of this remained unspent in January, with most of the money earmarked for union pension funds, veterans’ health care, and medical research.
Biden’s efforts to cancel around $400 billion in student debt are also on the chopping block. Republicans have argued that the student debt wipeout is unfair to those who didn’t rack up loans to go to college or who sacrificed to pay off their debts.
The GOP plan would also repeal incentives for renewable energy, electric vehicles, and other supposedly green technologies that Democrats passed last year as part of the Inflation Reduction Act.
The proposal would also give Congress more power to review new rules put forward by the executive branch, potentially giving Republicans more power to block regulations they consider detrimental.
The package includes a fossil-fuel bill aimed at promoting energy development on federal lands, reducing regulations, and eliminating Democratic-backed climate incentives.
When the United States reached the $31.4 trillion debt cap in January, the Treasury Department started resorting to so-called “extraordinary measures” to keep making payments on outstanding federal debt obligations and keep the government from defaulting.
At some point, however, these extraordinary measures will run and the federal government will stand face to face with the prospect of being unable to meet its financial obligations—known as the X-date.
When the X-date is reached and there’s no agreement to lift the debt cap, the Treasury Department will be unable to issue any more bills, bonds, or notes. It could only make payments on its debt obligations from tax revenues.
Yellen predicted in a January letter (pdf) to lawmakers that the X-date could come as early as June 5.
The nonpartisan Congressional Budget Office (CBO) has projected that the X-date would fall at some point between July and September.
JPMorgan analysts said in a recent note that they see a “non-trivial” risk of a U.S. debt default.
Market signals suggest that investors are starting to get nervous about the prospect of a default, with the cost of insuring exposure to U.S. sovereign debt rising to its highest level since 2011 last week.
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