Debt ceiling: Yellen says default would cause ‘widespread suffering’
Zachary Halaschak
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Treasury Secretary Janet Yellen warned on Tuesday that the United States defaulting on its debt would be catastrophic for the economy.
Yellen, delivering remarks before Independent Community Bankers of America in Washington, D.C., spent a good portion of her speech focused not only on the need for lawmakers to raise the debt ceiling but also on the consequences of if a deal between President Joe Biden and Republicans isn’t inked before the fast-approaching “X Date” — that is the point at which the Treasury cannot pay all incoming bills on time and in full.
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She said that once the Treasury runs out of extraordinary measures and the U.S. experiences a default, the economy would find itself in an “unprecedented economic and financial storm.” Millions of people who rely on federal government payments would go unpaid, ranging from 66 million Social Security beneficiaries to veterans, Yellen said.
“A default could cause widespread suffering as Americans lose the income that they need to get by. And the resulting income shock could lead to a recession that destroys many American jobs and businesses,” she told the crowd.
The treasury secretary also warned a default could disrupt government operations more broadly.
“Essential services that enable global commerce rely on the work of federal employees and contractors. That includes air traffic control and law enforcement, border security and national defense, and food safety, and our telecommunications systems. But federal agencies would be unable to pay all of their bills,” Yellen continued. “It is unclear if, and how, critical government services would continue to function.”
She also warned a default could plunge the U.S. and the world into a financial crisis. Defaulting would upend a fundamental principle in modern finance — that the U.S. always pays the principal and interest on its bonds in full and on time, Yellen said.
“A default would crack open the foundations upon which our financial system is built. It is very conceivable that we’d see a number of financial markets break — with worldwide panic triggering margin calls, runs, and fire sales,” she cautioned.
She noted that the White House Council of Economic Advisers charted out the economic effects of a protracted default scenario. The council found that a default would lead to an economic downturn as bad as the Great Recession, with over 8 million people losing their jobs. The entire value of the stock market could be shredded by an enormous 45%.
“If that sounds catastrophic — that’s because it is,” Yellen said on Tuesday.
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Yellen’s warning comes on the same day Biden and congressional Republicans are scheduled to meet and discuss the debt ceiling. They met last week.
Republicans are hoping to use the looming deadline, which Yellen said could come as soon as June 1, as leverage to exact big concessions. But experts worry about how much progress is being made of late, given how little time there is for lawmakers to craft a bill and stave off default.