Janet Yellen Says Default Would Be “Catastrophic”

Janet Yellen, the Secretary of the Treasury, said over the weekend that if Congress didn’t act quickly on the debt ceiling, it could trigger what she called a “constitutional crisis” that eventually could bring into question whether the U.S. federal government was creditworthy or not.

Appearing on the “This Week” ABC program on Sunday, Yellen said there would be catastrophic consequences on the financial markets if Congress doesn’t act to raise the debt ceiling by early next month. That’s when she said that the federal government might not have enough cash on hand to pay all of its debt obligations.

She further said that negotiations about raising the debt ceiling shouldn’t involve people holding “a gun to the head of the American people.”

The negotiations thus far haven’t been going anywhere. The House of Representatives, led by Republicans, passed a new bill in April that would raise the debt ceiling. However, the bill also included plenty of major spending cuts over the next 10 years.

President Joe Biden has implored Congress to put no conditions on raising the debt ceiling. As such, he and his fellow Democrats are unlikely to accept the House Republicans’ proposal.

This week, the president is planning to sit down with House Speaker Kevin McCarthy, Senate Minority Leader Mitch McConnell and some of the top Democrats in Congress to talk about the debt ceiling.

As Yellen said this weekend:

“It’s Congress’ job to do this. If they fail to do it, we will have an economic and financial catastrophe that will be of our own making.

“And we should not get to the point where we need to consider whether the president can go on issuing debt. This would be a constitutional crisis.”

Biden has stayed firm on his demand that the debt ceiling not be tied to massive spending cuts. However, he did say that he would be open to discussing cuts to the budget once a new debt ceiling limit were to be passed.

That would be a different approach than has happened in the past, as Congress often pairs increases in the debt ceiling with other spending and budget measures.

The debt ceiling is currently set at about 120% of the annual economic output for the U.S. The country’s total debt reached that mark back in January, but the Treasury Department has been able to keep all obligations just within that limit.

Yellen did say, though, that if nothing is done, the U.S. would have to stop borrowing money altogether by July or August. If that were to happen, shockwaves would likely ripple through financial markets around the world. 

Investors would question the ultimate value of bonds issued by the U.S., which are often seen as some of the safest investments in the world. They’re even considered to be building blocks for the financial system of the entire world.

So, if confidence in them were to collapse, the effects of a U.S. default would be much larger than just a domestic issue.