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Yellen Warns of 'Economic Catastrophe' if U.S. Defaults on Debt

On Tuesday, U.S. Treasury Secretary Janet Yellen warned that if Congress fails to raise the government's debt ceiling, the resulting default will lead to an "economic catastrophe." She said this would cause interest rates to rise significantly for years.

Janet Yellen
Janet Yellen

Default Impact on Jobs and Households

Yellen explained that defaulting on U.S. debt would result in job losses and increased household payments for mortgages, auto loans, and credit cards. She called on Congress to fulfill its "basic responsibility" of raising or suspending the $31.4 trillion borrowing cap.

Importance of Raising the Debt Ceiling

Yellen emphasized that raising the debt ceiling is crucial for maintaining economic progress since the COVID-19 pandemic. She warned that defaulting on the debt would make future investments considerably more expensive.

Potential Effects on Businesses and Government Payments

If the debt ceiling is not raised, Yellen said U.S. businesses would face worsening credit markets, and the government might be unable to issue payments to military families and seniors who depend on Social Security.

Congress Urged to Act Without Conditions

Yellen insisted that Congress must vote to raise or suspend the debt limit without conditions and not wait until the last minute. She had previously informed lawmakers that the government could only pay its bills through early June without raising the limit.

U.S. Debt Ceiling Unique Among Developed Countries

Unlike most developed nations, the U.S. imposes a hard limit on borrowing. Lawmakers must periodically raise the debt ceiling since the government spends more than it receives.

Proposed Plans and Market Concerns

The White House and the Democratic-controlled Senate are likely to reject a plan proposed by Republican House leader Kevin McCarthy, which links $4.5 trillion in spending cuts to a $1.5 trillion debt cap increase. Financial markets are increasingly worried about the standoff, with the cost of insuring exposure to U.S. debt reaching its highest level in a decade.