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US Treasury Secretary Janet Yellen warned on Saturday of dire consequences if the country does not raise its statutory debt ceiling in the coming months. According to the senior official, the United States could default on its debt by the summer, resulting in a financial crisis.
It would be disastrous. “It’s a disaster,” Yellen told Axios, adding that “we’ll have a financial crisis and I believe we’ll have a recession in the United States.”
“Spending would have to decline to match tax revenues,” Yellen said, removing the government’s ability to stimulate the economy. Furthermore, “psychological consequences” such as people being afraid to spend money may “further impact spending and deepen the recession.”
She added that a full-fledged US debt default would have repercussions throughout the global economy.
“Americans would face higher borrowing costs, and it would cause significant global turmoil,” Yellen said.
Earlier this month, the secretary began to raise the alarm about a potential US debt default, notifying the US Congress that the Treasury had begun to invoke emergency measures to prevent the country from exceeding the national debt ceiling, which is now set at $31.4 trillion. The majority of the measures involve temporarily suspending payments that are not immediately required to keep the government running. However, Yellen stated at the time that the measures only go so far as to give Congress time to negotiate and pass a debt limit increase, most likely until early June. Without the increase, she said, default would be imminent.
“The president and the leadership of Congress must find a way to raise the debt ceiling,” she told Axios.
The debt ceiling, first enacted by Congress in 1917, prohibits the US Treasury from issuing new government bonds to fund government operations once the debt ceiling has been reached. Overcoming the limit jeopardizes the federal government’s ability to make routine budget payments, including payments for various social expenditures. Furthermore, the government’s ability to pay debts and interest on existing obligations could be severely harmed.