Yellen warns of debt ceiling ‘catastrophe’ for US and beyond

Treasury Secretary Janet Yellen told Axios she was “nervous” about the US defaulting on its debt and warned that Americans would likely face a scary, spiraling recession if the Congress was not raising the debt ceiling this summer.

Why is this important: Yellen’s gloomy financial forecast is part of the Biden administration’s attempt to politically pressure the new House GOP majority to raise the debt ceiling without delay or hesitation.

• It’s also the unvarnished prediction of a former Fed chairman who was at the forefront of the debt ceiling showdown in 2011, when credit agencies downgraded US debt for the first time in history. American.

What they say : “Of course it makes me nervous,” Yellen told Axios from Johannesburg, South Africa, at the end of a 10-day trip across the continent. “It would be devastating. It’s a catastrophe.”

• In case of default, “we will have a financial crisis”, she said. “And I believe we would have a recession in the United States.”
• If the government was unable to issue new debt, the economy would collapse. “Spending is expected to decline to match tax revenue,” Yellen said, stripping the government of any ability to revive the economy with stimulus.
• Then fear could run wild, making consumers too scared to spend — a scenario Yellen called “psychological consequences” that “could further impact spending and worsen a recession.”

Driving the news: The threat of a default clouded Yellen’s trip to Africa, where on her first stop, in Dakar, she rejected a Republican proposal to prioritize debt payments.

Enlarge: Yellen’s trip was designed to persuade Africans, including elected officials, business leaders and farmers, that the United States seeks a long-term relationship on everything from food security to rural electrification.

• But the possibility of an American default reminded Yellen’s African hosts that the United States is divided. Promises made by one political party are not guaranteed to be honored by the other.

Zoom out: Like Russia’s invasion of Ukraine, a total US default would have repercussions around the world, making it more expensive to borrow money in some of the world’s poorest countries.

• “Americans would face higher borrowing costs, and that would also cause a lot of turmoil globally,” Yellen said.

Between the lines: Yellen doesn’t seem keen on spending late nights negotiating the debt ceiling with incoming House Speaker Kevin McCarthy (R).

• She is careful to say that any official negotiation will take place between the White House and Congress. “The president and the leadership of Congress are responsible for finding a way to raise the debt ceiling,” she said.

Be smart: By law, the Secretary of the Treasury is the nation’s accountant. On the debt ceiling, she is also the timekeeper.

• Throughout this process, it will sound two kinds of alarms: warning how close the US is to actual default and how catastrophic a default would be for the US and global economy.