US Treasury Secretary Janet Yellen said that failure to avoid a federal debt default would undermine Washington’s ability to lead the world economically and defend US national security.
This is not the first time that Yellen has warned that a default could cause an “economic and financial catastrophe”, but she revealed these new challenges yesterday, Thursday, while participating in the meeting of financial officials of the Group of Seven in Japan.
Yellen said – according to the text of her statements issued by the Treasury Department – that default “could cause a global slowdown … that would also risk undermining the global economic leadership of the United States, and raise questions about our ability to defend our national security interests.”
Earlier this week, a meeting held at the White House between US President Joe Biden and senior congressional leaders failed without achieving any significant progress indicating that they are close to resolving the debt ceiling impasse, and the consequent default on financial obligations for the first time in American history. . The two sides agreed to meet again in the future, while negotiations continued between their aides.
Here, an important question arises: To what extent will the federal government’s default on debt payments affect the US and global economies? Could it really undermine Washington’s ability to lead internationally and defend US national security?
Dimensions of the debt ceiling crisis
In the report published by the White House on the dimensions of the debt ceiling crisis, it was stated that the maximum US government borrowing affects only the ability to pay existing obligations and not new aspects of spending.
The report added that the current crisis is a political crisis, not an economic one in the first place, but it warns of the possibility of disrupting financial markets, as failure to raise the debt ceiling may eventually lead to defaulting on payment for the first time ever in some of the US government’s obligations.
In time constraints, the debt ceiling has become the subject of brinkmanship.
The United States of America is getting dangerously close to the current federal debt ceiling of $31.4 trillion. The report indicated that the day on which America loses its ability to meet all payment obligations – known as the “X” day (date-X) – could be by the first of next June.
The report confirmed that the Treasury Department has been using exceptional measures such as stopping regular contributions to the Federal Employees Retirement Fund in order to continue paying debts and delaying payments since January, and once these measures are exhausted, the available options become more difficult.
The debt ceiling was established in 1917 to facilitate the financing of World War I by pooling bonds of different denominations, and with the approach of World War II in 1939 Congress created the first aggregate debt ceiling.
The report stressed that the idea of canceling the debt ceiling is possible, because the repeated congressional battles over it increase the state of economic uncertainty.
There are many ideas on the table to circumvent this ceiling, such as minting platinum coins worth a trillion dollars and placing them in the Federal Reserve coffers, or declaring that the debt ceiling constitutes a violation of the 14th Amendment, which prohibits questioning the federal debt.
The Treasury can also issue premium bonds by offering much higher interest rates, and then investors will buy them, thus providing the government with the necessary liquidity, but with a reduction in the face value of the debt in order to avoid exceeding the ceiling.
In a report published by Usnews, writers Tim Smart and Kaya Hubbard identified the dimensions and risks of the United States defaulting on debt, and confirmed that there are many risks, the most important of which are:
Impact on the economy and lives of Americans
- Hindering the government’s ability to fund its operations, including by providing funds for national defense or funding benefits such as Medicare or Social Security.
- Downgrade the credit rating.
- Increased borrowing costs for businesses and homeowners alike.
- Decreased consumer confidence and pushed the economy into recession.
- Avoid investments that promote economic growth.
- 3 million jobs lost.
Influencing the position of the dollar and enhancing the prospects for recession
- Undermining the strength of the dollar and its position in the global financial system.
- An expected depreciation of the dollar makes debt denominated in other currencies more expensive.
- Causing investors to sell US Treasury bonds and thus weaken the US dollar.
- US Treasury bonds have lost their edge as a risk-free asset.
- Possible US GDP contraction by 4%.