US Treasury Secretary Janet Yellen has warned that defaulting on US debt would lead to an economic disaster, increasing job losses and credit payments. Speaking at the 51st "Capital-to-Capital" event of the Sacramento Metropolitan Chamber of Commerce, Yellen referred to the recovery of the US economy under President Joe Biden following the COVID-19 pandemic.
Yellen pointed to investments made to keep the country's economy strong in the long run, and explained that steps taken under the Inflation Reduction Act offer economic opportunities for Americans for generations to come.
She also reminded Congress to raise or suspend the debt limit, a problem that could threaten the progress made over the past two years.
Yellen stressed that the US has always paid its debts on time since 1789 and that this should continue. "Defaulting on our debt would lead to an economic and financial disaster. Many people could lose their jobs. Mortgage, auto and credit card payments would increase, and American companies would see credit markets deteriorating," she said.
Yellen also emphasized that defaulting on US debt would make it more difficult to pay social security benefits and permanently increase borrowing costs in the long run.
She said that the "economic disaster" could be prevented and the solution was simple: Congress should vote to raise or suspend the debt limit and should not wait until the last minute. "I believe that achieving this is the fundamental responsibility of our country's leaders," she added.
The debt limit crisis in the US
The federal government in the US has reached its $31.4 trillion debt limit, which could lead to default. The debt limit or ceiling is the upper limit on the amount of money that the US government can borrow to pay its debts.
The debate over the debt limit carries more risks than ever before
Republicans, who now have a majority in the House of Representatives, are pushing for significant spending cuts in debt limit negotiations. Democrats, on the other hand, insist on raising the debt limit and reject the Republican proposals to cut certain expenses.
The debt limit stalemate between Democrats and Republicans is causing concerns that it will unsettle markets. As expectations of a recession increase in the US, the showdown over the debt limit carries more risks than ever before.