US Will Fall Into Recession if Debt Limit Showdown Not Resolved Soon, Yellen Warns

Republicans have shown no signs of backing down on their intransigence over the debt ceiling, with President Joe Biden warning on Monday that the clock is ticking before the federal government breaches the existing $28.4 trillion debt limit and the US is forced into defaulting on its obligations for the first time in the nation’s history.

It’s “utterly essential” for lawmakers to raise America’s debt ceiling ahead of the 18 October deadline to prevent America from defaulting on its debts, Biden Treasury Secretary Janet Yellen has warned.

“I support getting it done… We have to raise the debt ceiling as a routine matter whenever the country runs budget deficits,” Yellen told CNBC on Tuesday, when asked about whether she would support a Democratic manoeuvre known as reconciliation to raise the debt ceiling without support from the GOP.

“It’s really up to Speaker [Nancy] Pelosi and Leader [Chuck] Schumer how to get this done in Congress. What I can tell you is that it’s utterly essential that this be done. I’ve said that by 18 October, we will be out of extraordinary measures, have limited cash and likely to exhaust it very quickly,” she warned.

“It would be catastrophic to not pay the government’s bills, for us to be in a position where we lack the resources to pay the government’s bills,” Yellen stressed. “It really undermines confidence in the full faith and credit of the United States, our willingness to stand behind our debts, and [to] make sure that we pay them,” she said.

Yellen noted that she “fully” expects America to be plunged into a recession if the debt ceiling is not raised, and said that 50 million senior citizens who depend on social security, servicemen and women, and the 30 million households waiting for child tax credit payments would be seriously affected.

Dollar Will Be Doomed

Yellen also suggested that the negative impact of a US default on the dollar’s global status as the world’s de facto reserve currency should not been overlooked.

“US Treasury securities have long been viewed as the safest asset on the planet. That partly accounts for the reserve status of the dollar. Placing that in question by failing to pay any of our bills that come due would really be a catastrophic outcome,” she emphasised.

Yellen also dismissed the proposed minting of a $1 trillion platinum coin as a fix to pay off some of the US’s debt as a “gimmick.”

“What’s necessary is for Congress to show that the world can count on America’s debt. The platinum coin is equivalent to asking the Federal Reserve to print money to cover deficits that Congress is unwilling to cover by issuing debt. It compromises the independence of the Fed, conflating monetary and fiscal policy,” she indicated.

Taking advantage of a loophole in US laws allowing the Treasury to mint platinum coins at any denomination it likes, the platinum coin idea was brought up last week as one possible way to prevent the US from going into default. In an emergency, the coins could be minted within hours to bridge any gaps between the time that money runs out and the debt ceiling is raised.

The United States introduced the concept of a debt ceiling in 1917, during which time lawmakers capped maximum allowable borrowing by the federal government at $11.5 billion. The ceiling has been raised more than 100 times since then, and now stands at well over $28 trillion.

President Biden slammed Republicans for behaving in a “reckless and dangerous” manner over their stonewalling on the debt ceiling issue after some lawmakers sought to tie the debt issue to Democrats nixing of a proposed $3.5 trillion spending package. “I think, quite frankly, it’s hypocritical, dangerous and disgraceful,” Biden said of the resistance, recalling the support shown by Democrats to the GOP during previous instances when the debt ceiling was raised – including the estimated $7.8 trillion in debt racked up under President Donald Trump.

Republican Senate Minority Leader Mich McConnell penned an open letter to Biden on Monday, accusing Democrats of wishing “to govern alone” and saying they would subsequently “handle the debt limit alone as well.”

Congress reached a last-minute deal last week to prevent a government shutdown on 30 September, but the debt ceiling issue remains unresolved as the two parties wrangle over the president’s budget and infrastructure spending proposals.

Economists have warned that the US defaulting on its debts could immediately spark a global economic crisis – with the contagion of US insolvency quickly spreading to countries like Japan and China which hold large quantities of US Treasuries. Last month, a report by New York-based risk consultancy Eurasia Group estimated that there was about a 20 percent chance of a technical default taking place.