Janet Yellen says default can be a castrophe

WASHINGTON — Failure to boost the U.S. debt ceiling would cause an “economic catastrophe,” Treasury Secretary Janet Yellen said Monday.

“That’s something that would produce financial chaos, it might drastically reduce the quantity of spending and would mean that Social Security recipients and veterans and folks counting on money from the federal government that they are owed, contractors, we just wouldn’t manage to pay for to pay the bills,” Yellen told CNBC’s “Closing Bell: Additional time.”

Yellen’s comments got here as a political stalemate over raising the debt limit was forcing the Treasury Department dangerously near a worst-case scenario: a possible U.S. debt default. This could occur if Treasury were to exhaust the extraordinary measures it implemented earlier this yr to satisfy its obligations after the U.S. reached its statutory debt limit of $31.4 trillion.

With a view to avoid a default on the nation’s debt, Congress must vote to either raise or suspend the debt limit before Treasury runs out of emergency funding. But with only eight days left this month during which each the House and the Senate are scheduled to be in session at the identical time, time is running out to succeed in a deal.

“There is a very big gap between where the president is and where the Republicans are” on raising the debt ceiling, Yellen said.

Treasury and the Congressional Budget Office each released latest reports last week predicting that extraordinary measures might be exhausted as early as June 1, which was before Wall Street or the White House had been expecting. The brand new, earlier date was the results of lower-than-expected federal tax revenues in April.

On Tuesday, Biden will host a high-stakes meeting on the White House with the 4 top leaders of Congress: House Speaker Kevin McCarthy, R-Calif., House Minority Leader Hakeem Jeffries, D-N.Y., Senate Majority Leader Chuck Schumer, D-N.Y., and Senate Minority Leader Mitch McConnell, R-Ky.

The White House says the meeting won’t include negotiations on raising the debt limit, which Biden says Republicans must comply with raise without preconditions. To date, Republicans have refused to approve a debt ceiling hike unless it’s accompanied by sweeping cuts to federal spending.

Economists on each side of the aisle agree that even a really transient default would send shock waves through equities markets and send rates of interest soaring.

“Short-term funding markets, that are essential to the flow of credit that helps finance the economy’s day-to-day activities, likely would shut down as well” within the event of a default, said Mark Zandi, chief economist of Moody’s Analytics, at a Senate hearing in March.

The looming debt ceiling crisis has also forced Yellen to “compress” her trip to Japan this week. She is scheduled to attend a gathering of G-7 finance ministers and central bankers.

Yellen’s core priorities for the summit can be “strengthening the worldwide macroeconomy, redoubling our commitment to Ukraine because it defends itself against Russia’s barbaric war and third, our work to bolster economic resilience and security,” the Treasury Department said in a press release Friday.

Behind the scenes, the secretary can also be prone to face questions from her G-7 counterparts concerning the debt ceiling debate and the prospect of a U.S. default. “If we were to compromise the credit standing of america, and even worse to default on the debt, I believe that might have an antagonistic impact on the dollar’s use as a reserve currency,” Yellen told CNBC.

“The dollar is thought to be the bedrock, protected asset in all the global economic system. It’s trusted, and it’s the final word protected asset and a failure to boost the debt ceiling, impairing the U.S. credit standing, would put that in danger,” she said. “So that may be a real concern.”