The country faces a recession if it defaults on its debt, the Treasury Secretary has said
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US Treasury Secretary Janet Yellen on Saturday warned of dire consequences the country may be facing if it doesn’t hike its statutory debt ceiling in the coming months. According to the senior official, the US could default on its debt by summer, which would lead to a financial crisis.
“It makes me nervous…It would be devastating. It’s a catastrophe,” Yellen told Axios news outlet, adding that “we’ll have a financial crisis and I believe we would have recession in the United States.”
“Spending would have to decline to match the tax revenues,” Yellen said, which would strip the government of the ability to support the economy with stimulus. Furthermore, “psychological consequences” like people fearing to spend money could then “further impact spending and deepen a recession.”
She noted that a full-blown US debt default would also send ripple-effects across the global economy.
“Americans would face higher borrowing costs, and it would cause a good deal of turmoil globally as well,” Yellen said.
The secretary began to raise the alarm on potential US debt default earlier this month, notifying the US Congress that the Treasury had started to invoke emergency measures to prevent the country from reaching the national debt ceiling, now set at $31.4 trillion. The measures largely involve temporarily suspending payments that are not immediately necessary to keep the government running. Yellen noted at the time, however, that the measures only go as far as to give the Congress time to negotiate and pass a debt limit hike, most likely until early June. Without the hike, default would be imminent, she said.
“The president and the leadership of Congress are responsible to find a way to get the debt ceiling raised,” she told Axios.
The debt ceiling, which was first enacted by the Congress in 1917, prevents the US Treasury from issuing new government bonds to fund government operations after the debt ceiling is reached. Exceeding the limit means that the federal government’s ability to make routine budget payments, including paying for various social expenditures, is at risk. Moreover, the government’s ability to pay debts and interest on obligations already incurred could be seriously undermined.
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