Treasury Secretary Janet Yellen has issued a grave warning, emphasizing that time is rapidly dwindling to avert a looming economic catastrophe resulting from the failure to raise the debt ceiling.
Her cautionary remarks came just before Tuesday’s highly anticipated meeting between President Joe Biden and congressional leaders, which sought to address the ongoing deadlock.
In a proactive move, Speaker Kevin McCarthy released a statement on Monday evening, underscoring the urgency of the situation and stressing the limited number of days remaining to tackle the issue at hand.
Despite the anticipation surrounding the meeting, there were scant indications of any substantial agreement between the two sides. The primary focus of the discussion leading up to this second encounter on the debt ceiling within a fortnight has been primarily centered around the ticking clock. While high-level staffers have engaged in negotiations for several days, Republicans persist in pushing for significant spending cuts, while Democrats remain steadfast in their determination to safeguard President Biden’s legislative accomplishments.
“We are already seeing the impacts of brinksmanship: investors have become more reluctant to hold government debt that matures in early June,” Yellen said in remarks to a banking conference on Tuesday.
“The impasse has already increased the debt burden to American taxpayers.”
In a renewed effort to convey the gravity of the situation, the Treasury Secretary sent a recent letter to congressional leaders on Monday, reiterating the imminent risk of the Treasury exhausting its funds to cover all federal obligations by June 1.
Excerpts from her speech, which were made public by the Treasury in advance of her appearance at the Independent Community Bankers of America Capital Summit, emphasized that the economic well-being of millions of Americans now hangs precariously in the balance.
“Every single day that Congress does not act, we are experiencing increased economic costs that could slow down the US economy,” Yellen said.
Since January, President Biden and Republican leader Kevin McCarthy have found themselves deadlocked over the crucial matter of raising the government’s borrowing limit, currently set at $31.4 trillion. Experts in the field of economics have issued stern warnings, cautioning that a default by the United States could trigger a market downturn, an upsurge in borrowing costs, and deal a blow to the global economy on par with the devastating 2008 crash.
McCarthy expressed his frustration with the lack of progress in staff-level meetings, describing them as unproductive and stating that negotiations were at a standstill.
The meeting scheduled for Tuesday comes just before President Biden is set to embark on a trip to Asia, intended to underscore the United States’ commitment to addressing strategic competition with China. Despite ongoing discussions regarding the debt ceiling, White House officials confirmed on Monday that there were no changes to the President’s plans to attend the Group of Seven summit in Japan, with additional stops in Papua New Guinea and Australia.
When asked about the President’s decision to travel abroad amidst the ongoing negotiations, McCarthy stated that he believed an American president should prioritize finding solutions for domestic issues, asserting that it reflects their values and priorities.
Insiders familiar with the meetings revealed that the White House has advocated for the exclusion of certain elements from the bill passed by House Republicans last month. This includes the elimination of the President’s program to forgive certain student loans, as well as other notable legislative achievements. Democrats proposed a measure aimed at raising revenue and reducing future deficits by making changes to a dozen provisions of the tax code. This would involve closing a loophole that allows investors in cryptocurrency to claim losses on assets they subsequently purchase, as well as eliminating a loophole that enables large real estate investors to receive interest-free financing from the government.
These tax proposals were originally part of President Biden’s budget proposal earlier this year. The White House offered additional proposals to Republicans but were informed that the GOP would not entertain any efforts to raise taxes, according to individuals familiar with the matter.
Representative Dusty Johnson of South Dakota, one of the authors of the House bill, outlined three non-negotiable points for Republicans: no clean debt increase, no tax increase, and the bill must contribute to reducing the deficit.
Treasury Secretary Janet Yellen, in her remarks on Tuesday, provided a comprehensive assessment of the potential consequences of failing to address the debt ceiling. She warned that a default could shake the very foundations of the global financial system, potentially leading to widespread panic, margin calls, runs on banks, and fire sales. Yellen also highlighted the significant impact on individuals, with recipients of Social Security and veteran benefits facing the cessation of their payments, resulting in widespread suffering. Furthermore, essential operations such as air traffic control, law enforcement, border patrols, and national defense could experience disruptions. The Council of Economic Advisers estimated that an economic downturn of a magnitude similar to the Great Recession of 2007-2009 could occur, with over 8 million job losses and a 45% decline in the stock market.
Secretary Yellen also addressed recent banking troubles in the United States, emphasizing that American deposits remain safe despite the rapid succession of failures among several regional banks in recent months.
“Recent banking troubles including the resolution of First Republic are not a sign of any shift in the fundamental health of the US banking system,” Yellen said.
“Americans should rest assured that their deposits are safe. Their deposits will be there when they need them.”