Yellen: US Will Take Extraordinary Steps to Avert Default

Treasury Secretary Janet Yellen Has Announced That the Department Will Begin Taking Special Accounting Measures to Avoid Breaching the US Debt Limit. She Has Urged Lawmakers to Boost the Ceiling to Avert a Devastating Payments Default.

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"The length of time that extraordinary measures may last is uncertain," Yellen wrote in a letter to bipartisan congressional leaders Friday. However, she said it is unlikely that cash and extraordinary measures will be exhausted before early June.

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The letter from the Treasury Department is the start of what is expected to be a long and intense political battle over US fiscal policy. This showdown could put a lot of pressure on financial markets and increase the risks for an economy that is already facing the possibility of a recession. According to economists, the Treasury Department will run out of money around August if the debt ceiling is not increased.

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The House's Republican leaders say they will only agree to raise the debt limit if there are spending cuts included. However, Democrats who control the Senate and President Joe Biden reject this approach, calling it "hostage-taking." They instead want a straightforward increase, as was offered to former GOP President Donald Trump.

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The current debt limit is $31.4 trillion. It was set in December 2021 when Congress raised it by $2.5 trillion. The government is currently $78 billion away from reaching the limit.

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In her letter, Yellen said that the Treasury Department would begin taking extraordinary measures to ensure that it can continue to meet its financial obligations. This will include redeeming existing investments and suspending new investments in the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund. The department will also suspend reinvestment of the Government Securities Investment Fund of the Federal Employees Retirement System Thrift Savings Plan.

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Yellen appealed to lawmakers to prevent a standoff on Capitol Hill from threatening US finances and financial markets, saying that those funds would be made whole after the impasse ends. It is essential that Congress take action to increase or suspend the debt limit in a timely manner. If the government fails to meet its obligations, it would cause severe damage to the US economy, the well-being of all Americans, and global financial stability.

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If the Treasury is unable to issue new debt and runs out of cash, the US government would default on its financial obligations. Wall Street analysts say the risk of default doesn’t really loom until the second half of 2023, after the extraordinary measures the Treasury uses to avoid exceeding the debt limit are exhausted.
"The United States government is committed to honoring the obligations that previous Congresses have made," Brian Deese, director of the White House's National Economic Council, said in a Bloomberg Television interview Friday. "This is a sacred obligation - the full faith and credit of the United States - and Congress will need to deal with the debt limit without attaching any conditions, without any games, and without putting our economy at risk."

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Yellen said that if the debt limit is not raised, federal contractors and employees would go unpaid, Social Security checks would stop, and investors in Treasury securities wouldn’t receive interest payments or get back their principal on maturing bills, notes and bonds.

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Some economists and bond strategists are warning that the world could see a repeat of the 2011 debt-ceiling standoff, when S&P Global Ratings downgraded the United States' sovereign rating from AAA. This caused equity markets to tumble around the world and hit consumer confidence in the United States, undermining the post-financial-crisis economic recovery.

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Lawrence Summers, who served as Treasury chief before Janet Yellen, said Friday that fights over the debt limit are the "dumbest" in Washington, given how important it is to honor US obligations.

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"A default would be a catastrophe - it would mean higher borrowing costs forever," said Summers. "As a Harvard University professor and paid contributor to Bloomberg Television, I believe that the consequences of a default would be devastating."