Severe economic consequences lie ahead for the U.S. if the government is unable to reach a deal on the debt ceiling by the end of the month, says U.S. Treasury Secretary Yellen.
Yellen delivered another grim warning on Thursday regarding the economic consequences of failing to reach a deal by the June 1 deadline.
“A default would crack open the foundations upon which our financial system is built,” Secretary Yellen said in prepared remarks during an Independent Community Bankers of America Capital Summit. “It is very conceivable that we’d see a number of financial markets break – with worldwide panic triggering margin calls, runs, and fire sales.”
For weeks, Yellen has warned Congress about the potential for a U.S. government default on its debts and the “catastrophic” financial consequences that would ensue if legislators do not increase or suspend the debt limit.
The United States reached its $31.4 trillion debt ceiling in mid-January, prompting the Treasury secretary to enact “extraordinary measures” to keep the government from defaulting on its payments.
During her meeting with more than a dozen large bank CEOs, Secretary Yellen claimed that 8 million Americans could lose their jobs, and the stock market’s value could fall by about 45% if a deal is not reached. These warnings are in line with forecasts from the White House Council of Economic Advisers (CEA).
“Analysis by CEA and outside researchers illustrates that if the U.S. government were to default on its obligations—whether to creditors, contractors, or citizens—the economy would quickly shift into reverse, with the depth of the losses a function of how long the breach lasted,” The White House claimed in May 3 report titled “The Potential Economic Impacts of Various Debt Ceiling Scenarios.”
The report notes that “a protracted default would likely lead to severe damage to the economy, with job growth swinging from its current pace of robust gains to losses numbering in the millions.”
Besides meeting with large bank CEOs, including JPMorgan Chase CEO Jamie Dimon and Citigroup CEO Jane Fraser, Yellen also met with executives from mid-size banks to discuss the debt ceiling and the banking crisis, CNN reported.
Despite some of the fears surrounding more bank collapses, Yellen has continually reaffirmed the strength and soundness of the US banking system. As the May 3 White House report notes, however, more banks may face collapse if a deal is not reached to raise or suspend the debt ceiling.
Concerns were compounded on Friday after talks between House Republicans and the White House fell through, with House Speaker Kevin McCarthy (R-CA) suggesting that it was time to “pause” negotiations and White House officials citing “real differences,” per AP News.
“We’ve got to get movement by the White House and we don’t have any movement yet,” McCarthy said at the time. “So, yeah, we’ve got to pause.”
House Republicans have already presented a bill to raise the debt ceiling involving steep spending cuts to get deficit spending under control. However, the Biden administration has refused to negotiate on any significant spending cuts, instead wanting to increase federal spending.
If a deal is not reached by June 1, the United States will officially default on its debts for the first time in history.
