Treasury Secretary Janet Yellen told Congress on Friday that she will begin taking emergency measures to prevent an unprecedented default on the national debt, warning that it would cause “irreparable harm to the U.S. economy and the livelihoods of all Americans.”
In a letter to House of Representatives Speaker Nancy Pelosi, Yellen said that Oct. 1, the first day of the next fiscal year, could be a critical date for the U.S. ability to pay its obligations without debt limit legislation due to large federal outlays scheduled for then.
In her letter, Yellen said her actions will buy time until Congress can pass legislation to either increase the statutory debt limit, currently set at $28.5 trillion, or suspend it again for a period of time. The total debt subject to the limit now stands at $28.4 trillion.
The debt limit has been suspended for the past two years but will go back into effect on July 31.
A partisan fight over raising the debt ceiling erupted in Congress as Republicans seized upon the credit limit to attack Democrats for pushing legislation the GOP claims has led to inflation and rising public borrowing, despite the record-setting debt incurred during the Trump era.
Yellen said her first move on July 30 will be to suspend the sale of state and local government securities, which are used by some local jurisdictions to meet some of their financing needs but increase the level of debt held by the federal government.
If Congress has not acted to either raise the debt limit or suspend it by Aug. 2, Yellen said she will be taking “certain additional extraordinary measures in order to prevent the United States from defaulting on its obligations.”
In her letter, Yellen noted that even the threat of a debt default — something the United States has never done — triggered the country’s first-ever credit downgrade during a standoff between Republicans in Congress and the Obama administration in 2011.
At that time, credit rating agency Standard & Poor’s downgraded its rating on a portion of U.S. debt.
“That is why no president or Treasury secretary of either party has ever countenanced even the suggestion of a default on any obligation of the United States,” Yellen wrote.
Senate Minority Leader Mitch McConnell threatened that all Republican senators might vote against extending the borrowing authority because they object to President Joe Biden’s plans to pay for domestic spending by raising taxes on the rich.
That may force Democrats – who would lack the 10 GOP supporters they need to overcome a Republican filibuster – to move laws through the Senate with 50 votes instead of 60, as required by current rules.
After every Senate Republican voted to block a sweeping democracy reform bill, 150 civil rights groups led by the Leadership Conference on Civil and Human Rights said in a strongly worded letter to Biden: “we certainly cannot allow an arcane Senate procedural rule to derail efforts that a majority of Americans support.”
A failure to work out differences among lawmakers over whether government spending cuts should accompany an increase in the statutory debt limit, currently set at $28.5 trillion, could lead to a federal government shutdown – as has happened three times in the past decade – or even a default.
Default is the failure of a borrower to repay a debt, or miss timely payments.
If the government were to default, consequences would ripple out on a global scale:
- Interest rates would soar. Currently, the federal interest rate is extremely low while the economy recovers from the COVID-19 pandemic. However, a U.S. debt default could shift this far into the other direction. It would cost businesses, governments, and loan recipients of all kinds a lot more to borrow money.
- The value of the U.S. dollar would take a beating. Not only that, but the U.S. dollar would lose its status as a global currency. Meanwhile, investors would hop on other world currencies like the euro or yen.
- U.S. import prices would rise through the roof, which would make it extremely expensive to live in the country. Inflation would hit hard and fast.
- Any government employee would be out of luck for their paychecks. Also, any citizen receiving or set to receive Social Security, Medicare, and Medicaid benefits would lose those programs entirely. Payments on student loans, tax returns, and government facilities would shut down. Unlike a government shutdown that impacts only non-essential programs, the impacts of a U.S. debt default would be far-reaching.
- U.S. credit rating downgrades can tank stock markets too. American wealth and stability in many forms would be in turmoil.
Senate Majority Leader Chuck Schumer called McConnell’s threats “shameless, cynical and totally political.”
Democrats haven’t yet decided on a legislative strategy to deal with a debt-limit impasse but Yellen’s letter could steer them toward putting a provision extending the debt limit into a bill Congress will have to approve before Oct. 1 to prevent a government shutdown then.
Yellen’s reference to the use of “extraordinary measures” to allow the government to keep borrowing to meet its debt service obligations and make payments on such benefits as Social Security refers to a variety of book-keeping maneuvers previous Treasury secretaries have used.
Those include disinvesting funds from accounts that pay pension benefits to government workers. Once the debt ceiling is dealt with, the funds that have been disinvested from various government accounts are replenished.
Yellen said the unusual circumstances surrounding the government’s response to the coronavirus pandemic made it hard to predict when she will run out of maneuvering room. She said that under some scenarios, her ability to keep borrowing might come to an end soon after Congress returns from its August recess.
She said a particular challenge will come on Oct. 1, when government resources are expected to decline by about $150 billion due to large mandatory payments, including a required investment for Department of Defense-related retirement and health care support.
White House Press Secretary Jen Psaki that the U.S. government has never defaulted, which she said would be a “catastrophic event.”
“We expect Congress to act promptly to raise or suspend” the debt limit and “protect the full faith and credit of the United States,” said Psaki.