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The U.S. government will have to default on some payments if Congress fails to raise the national debt ceiling before June, Treasury Secretary Janet Yellen said.
“If Congress fails to do that, it really impairs our credit rating. We have to default on some obligation, whether it’s Treasuries or payments to Social Security recipients,” Yellen said on Friday in an interview with Bloomberg.
“That’s something America hasn’t done since 1789,” she continued, referring to a time when the new-born United States failed to pay back money it borrowed to finance the war against the British Empire. “And we shouldn’t start now. So we’ve not discussed what to do.”
When asked about the speculation that her department would prioritize payments of interest and principal on Treasury securities in a default scenario, Yellen said the White House has never reviewed or approved such a plan.
“My understanding—I was at the Fed in 2011—is that this plan was never presented to the president and never approved,” Yellen told Bloomberg. In 2011, she was serving as vice chair of the Federal Reverse.
When asked if she would now present that plan to prioritize Treasuries to the president, Yellen replied, “We are working full time to work with Congress to raise the debt ceiling. That’s where our focus is.”
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Yellen Warns of Credit Downgrade
The remarks comes after she argued that a U.S. government default might trigger a downgrade of its credit rating and weaken consumer confidence, similar to what happened in 2011.
“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,” Yellen said Thursday in Japan, where she was attending a meeting of finance chiefs and central bankers of G7 countries.
“It would also risk undermining U.S. global economic leadership and raise questions about our ability to defend our national security interests,” she added.
Yellen pointed to the 2011 debt ceiling crisis that prompted Standard & Poor’s to lower the United States’ long-held top-notch AAA sovereign credit rating to AA-plus. She warned that another downgrade would drive up interest rates for consumers and companies seeking loans.
“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.
“The U.S. Congress has raised or suspended the debt limit about 80 times since 1960. I urge it to act quickly to do so once again.”
Democrats, Republicans Blame Each Other
Yellen’s comments echo those of President Joe Biden, who criticized Republican members of Congress for wanting to tie the debt limit increase to deficit-savings measures.
“They’re literally—not figuratively—holding the economy hostage by threatening to default on our nation’s debt,” Biden said Wednesday of what he called “extreme MAGA Republicans.”
Although the Biden administration insists that Congress pass a “clean” debt ceiling increase, almost every major debt ceiling agreement in the past 30 years had at least some kind of deficit-reduction law attached to it, including the 1993 Deficit Reduction Act under the Clinton administration, and the 2010 Pay-As-You-Go Act and the 2011 Budget Control Act under the Obama administration.
Republican congressional leaders remain cautious on defaulting national debt, as the nation’s top Republican, former President Donald Trump suggested that it’s better to let the U.S. government default than passing a budget that doesn’t include spending cuts.
“I say to the Republicans out there—Congressmen, Senators—if they don’t give you massive cuts, you’re going to have to do a default,” Trump said Wednesday during a town hall event hosted by CNN in New Hampshire.
“I don’t believe they’re going to do a default because I think the Democrats will absolutely cave because you don’t want to have that happen,” he told an undeclared voter in the audience. “But it’s better than what we’re doing right now, because we’re spending money like drunken sailors.”
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Speaking the day after the Trump town hall, Speaker of the House Kevin McCarthy (R-Calif.) said his party is working to avoid a default, while Democrats are pushing the nation closer to one.
“The only thing I see right now is that the Republicans made sure default is not on the table. We’ve raised the debt limit,” he said, reported The Hill.
“The only person talking about default right now is President Biden. His actions, he’s ignored this problem, just like he’s ignored the border, that means more Americans are gonna die from fentanyl. You had 11,000 people just yesterday come across.”