Yellen warns of a new economic debacle if Congress does not increase the debt ceiling

Yellen warns of a new economic debacle

It is a fight that is repeated almost every year. The United States approaches its debt ceiling and the political dispute comes into play, with the opposition to the White House tenant ‘blackmailing’ by not admitting the ceiling increase unless it achieves certain political objectives. Over the next few days, this fight returns to the fore, but the Secretary of the Treasury, Janet Yellen, has already warned of the economic disaster that it can cause, given the current context.

If Democrats and Republicans do not reach an agreement, the federal government would have to close – as it has happened three times in the last decade – or it could even default on payments.

For this reason, the US Secretary of the Treasury, Janet Yellen, sent a letter this Friday to the Congress of the country to raise or suspend the debt limit, because if not, it will have to take extraordinary measures that prevent the country from suspending payments.

Yellen announced that the Treasury Department will suspend the sale of local and state bonds on July 30 until a measure is adopted regarding the debt ceiling, and if Congress does not do so, on August 2 it will have to take extraordinary measures.

This would be just one of the first “extraordinary measures” that the Treasury could take to continue paying bills on time.

To have cash, the Treasury could also suspend investments in pension programs or directly borrow money from those funds, actions that it has already adopted on several occasions in the past and that then prolonged the Executive’s ability to pay for months.

This time, however, the situation is different because the Administration is spending a large amount of money on programs to keep the economy afloat due to the impact of covid-19.

According to a July analysis by the Congressional Budget Office, these “extraordinary measures” would allow the United States to have cash until October or November, when the dreaded suspension of payments on sovereign debt would occur.

“Irreparable damage to the US economy”

Yellen’s letter, addressed to the Speaker of the US House of Representatives, Democrat Nancy Pelosi, is a formality that all Treasury holders do when the country approaches the dangerous situation of suspending payments of its sovereign debt.

In the letter, the financial head of the US President’s Government, Joe Biden, recalls that increasing or suspending the debt limit does not mean increasing public spending, nor does it authorize spending increases in future budget proposals.

Simply, he stresses, he authorizes the Treasury to make the anticipated expenditure disbursements.

He also recalled that the current level of debt reflects the sum of expenditures already approved both by the Administration and by Congress itself and not meeting these payment obligations would cause “irreparable damage to the US economy and the livelihood of its citizens.”

Yellen warned that on other occasions “only the threat” of not complying with payment obligations produced a severe negative impact on the country’s economy and on market solvency, with the greatest drop in “rating” levels in the entire country. the history of the country in 2011.

“That is why the president and the secretary of the Treasury do not even want to be suggested” the possibility of a default on payment obligations, Yellen added.

In this sense, he stressed that in recent years Congress has always solved this problem on a regular basis and with the joint work of the two parties and that is why he asked him to act “as soon as possible” also on this occasion.