Treasury Secretary Janet Yellen said that a “historic financial crisis” may be triggered if Congress fails to raise the federal debt limit.
Two years ago, Congress suspended the debt ceiling — a measure that stops the federal government from taking on a certain level of national debt — until August 2021. After the policy expired, Yellen enacted “extraordinary” cash-saving measures to fund the federal government.
In an op-ed published by The Wall Street Journal, however, Yellen warned that the federal government will be unable to pay its bills as soon as next month unless Congress raises the debt limit:
In a matter of days, millions of Americans could be strapped for cash. We could see indefinite delays in critical payments. Nearly 50 million seniors could stop receiving Social Security checks for a time. Troops could go unpaid. Millions of families who rely on the monthly child tax credit could see delays. America, in short, would default on its obligations.
The U.S. has never defaulted. Not once. Doing so would likely precipitate a historic financial crisis that would compound the damage of the continuing public health emergency. Default could trigger a spike in interest rates, a steep drop in stock prices and other financial turmoil. Our current economic recovery would reverse into recession, with billions of dollars of growth and millions of jobs lost.
Yellen noted that the United States’ high degree of creditworthiness — investors’ expectation that the federal government will repay its obligations — has been the basis for its rapid economic expansion:
We would emerge from this crisis a permanently weaker nation. For about a century, America’s creditworthiness has been a major advantage over our economic competitors. We can borrow more cheaply than almost any other country, and defaulting would jeopardize this enviable fiscal position. It would also make America a more expensive place to live, as the higher cost of borrowing would fall on consumers. Mortgage payments, car loans, credit card bills — everything that is purchased with credit would be costlier after default.
The Biden administration recently warned states that a default on the national debt would throw the nation into recession, threatening the solvency of the Children’s Health Insurance Program, disaster relief efforts from FEMA, and $100 billion in infrastructure funding — all of which are at least partially funded by the federal government.
Earlier this year, Wall Street began showing renewed skepticism toward the federal government’s ability to repay its obligations. Fitch Ratings — one of the “Big Three” rating agencies on Wall Street — issued a “Negative Outlook” on the United States’ creditworthiness due to expanding federal debt. Though the United States kept its “AAA” rating, Fitch said that the outlook “reflects ongoing risks to the public finances and debt trajectory.”
The current national debt is $28.7 trillion.