China could be amongst first paid under GOP debt limit plan, Yellen says

WASHINGTON — Treasury Secretary Janet Yellen said Thursday that China could be among the many first in line to receives a commission under a Republican proposal to prioritize some U.S. debt obligations over others, calling it a “dangerous idea” that will technically cause the U.S. to default on its bonds.

House Republicans are holding up a bill to lift the U.S. debt ceiling, which hit its $31.4 trillion borrowing limit in January. They need any agreement on the debt limit to be paired with spending cuts on social programs.

Their latest debt ceiling proposal, which passed 21-17 out of the House Ways and Means Committee last week, would prioritize which payments the U.S. Treasury makes first when the U.S. hits the ceiling at which it cannot issue more bonds. The GOP plan places the next priority on making public debt obligations and Social Security payments than other sorts of government obligations.

“The federal government on average makes thousands and thousands of payments every day, and our systems are built to pay all of our bills on time and never to select and select which bills to pay,” Yellen said during a Senate Finance Committee hearing on the federal budget. “There’s a reason that Treasury secretaries of each parties have rejected this incredibly dangerous and dangerous idea and it’s never been tried before.”

Democrats have identified that the Republican plan to prioritize payments would profit Wall Street and China, since they hold most government bonds. China holds about $1 trillion of U.S. debt, about 3% of all U.S. debt outstanding.

“If Treasury follows this Republican plan, taking into account that China holds about $1 trillion in U.S. debt, who would receives a commission first?” asked Sen. Sherrod Brown, D-Ohio.

“Well, if that were prioritized, China would receives a commission ahead of them,” Yellen answered, referring to seniors who get Social Security and veterans who get VA advantages. She added that debt prioritization is “default by one other name.”

Economists have called the suggestion to pay some debts incurred by the federal government over others “badly misguided.”

“I cannot give any assurances concerning the technical feasibility of such a plan,” Yellen told lawmakers. “It might be an exceptionally dangerous, untested and radical departure from normal payment practices of agencies across the federal government.”

She said lawmakers needed to acknowledge that “raising the debt ceiling is their responsibility to guard the total faith and credit in the USA.”

The Treasury Department has initiated temporary measures in recent months to flee default, including suspending recent investments in certain federal retirement programs and a health profit fund. The measures are set to run out in June.

“We want to pay our bills. We want to pay all of our bills. That willingness and commitment to be responsible in paying bills which have already been incurred is what underlies the USA’ strong credit standing,” Yellen said.

“If we were to fail to pay any of our bills, that will call into query whether or not we deserve our current credit standing. And it’s simply a recipe for economic and financial catastrophe to think we are able to pay a few of our bills and never all of them,” she added.