Yellen warns of self-made crisis with debt default.

Treasury Secretary Yellen Urges Congress to Raise Debt Ceiling

Self-Made Crisis

Treasury Secretary Janet Yellen has accused the Republican-controlled House of creating a self-made crisis over its stance on the debt ceiling. Speaking at a Group of Seven (G7) conference in Niigata, Japan, Yellen called on Congress to raise the $31.4 trillion federal debt limit to avert a U.S. government default that would trigger a global economic crisis and undermine the strength of the world’s largest economy.

Impending Default

The Treasury Department has warned that the U.S. government could default as soon as June 1 without a deal. “A default would threaten the gains that we’ve worked so hard to make over the past few years in our pandemic recovery. And it would spark a global downturn that would set us back much further,” said Yellen.

Biden Meets with GOP Leaders to Negotiate Over Debt Limit

President Joe Biden met with top Republican and Democrat legislators on May 9 to resolve the three-month standoff over the debt limit. After what Biden called a “productive” meeting, both parties agreed to meet again on May 12 to solve the impasse before the June 1 deadline.

White House Considers Invoking 14th Amendment

The White House has discussed invoking the 14th Amendment of the U.S. Constitution to push through a ceiling hike, as it states that the “validity of the public debt of the United States, authorized by law … shall not be questioned.” That move may give the administration a way to issue the debt needed to pay the off government’s bills and ignore Congress over the debt ceiling. However, Yellen said that circumventing Congress was not a short-run solution and that it appears “legally questionable whether that’s a viable strategy.”

Implications of Default

Yellen warned that the threat of a default would lead to a downgrade of the government’s credit rating and weaken consumer confidence, similar to what happened during the last battle over the debt ceiling in 2011. “We could see a rise in interest rates drive up payments on mortgages, auto loans, and credit cards. We are already seeing spikes in interest rates for debt due around the date that the debt limit may bind,” she said. Yellen also called U.S. Treasury securities the most valuable assets in global financial markets, and that a U.S. default would cause a loss of confidence, leading to a worldwide depression.

Call for Changes to Fiscal Policy

Yellen added that the crisis highlights the need for changes to fiscal policy. House Speaker Kevin McCarthy (R-Calif.) called for trillions of dollars in spending cuts over the next decade in return for an increase, which Biden has resisted. Yellen said that the current situation is a “crisis of our own making” and that it is time for Congress to act.

What’s Next?

The clock is ticking, and the U.S. government is edging closer to default. It remains to be seen whether Congress will act in time to raise the debt ceiling and avert a global economic crisis.

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