Jan 28, 2023 - Politics & Policy

Yellen warns of debt ceiling "catastrophe" for U.S. and beyond

A white haired lady, Janet Yellen, scowls at the distance

Janet Yellen, secretary of the Treasury, listens during a meeting with Zambia President Hakainde Hichilema in Washington, D.C. Photo: Kevin Dietsch/Getty Images

Treasury Secretary Janet Yellen told Axios she is “nervous” about the U.S. defaulting on its debt and cautioned that Americans likely will face a scary and spiraling recession if Congress doesn’t raise the debt ceiling this summer.

Why it matters: Yellen’s dark financial forecast is part of the Biden administration’s attempt to put political pressure on the new House GOP majority to raise the debt ceiling without delay or hesitation.

  • It's also the unvarnished prediction of a former Fed chair who had a ringside seat to the 2011 debt ceiling showdown, when credit agencies downgraded U.S. debt for the first time in American history.

What they are saying: "Of course, it makes me nervous," Yellen told Axios from Johannesburg, South Africa, at the end of a 10-day trip across the continent. “It would be devastating. It's a catastrophe.”

  • In the event of a default, “we’ll have a financial crisis,” she said. “And I believe we would have recession in the United States.”
  • If the government were unable to issue new debt, the economy would go into a tailspin. “Spending would have to decline to match the tax revenues," Yellen said, depriving the government of any ability to juice the economy with stimulus.
  • Then fear might run loose, making consumers too scared to spend — a scenario Yellen called “psychological consequences” that "could further impact spending and deepen a recession."

Driving the news: The threat of a debt default has shadowed Yellen's trip to Africa, where on her first stop, in Dakar, she dismissed a Republican proposal to prioritize debt payments.

Zoom in: Yellen’s trip was designed to persuade Africans, including elected officials, business leaders and farmers, that the U.S. is looking for a long-term relationship on everything from food security to rural electrification.

  • But the possibility of an American default was a reminder to Yellen's African hosts that the U.S. is house divided. Promises made by one political party are not guaranteed to be honored by the other.

Zoom out: Like Russia’s invasion of Ukraine, a full-on U.S. default would have ripple effects across the globe, making it more expensive to borrow money in some of the world’s poorest countries.

  • “Americans would face higher borrowing costs, and it would cause a good deal of turmoil globally as well," Yellen said.

Between the lines: Yellen doesn’t seem terribly keen to spend late nights negotiating the debt ceiling with new House Speaker Kevin McCarthy (R).

  • She is careful to say that any official negotiations will happen between the White House and Congress. "The president and the leadership of Congress are responsible to find a way to get the debt ceiling raised,” she said.

Be smart: By law, the Treasury secretary is the nation's bookkeeper. On the debt ceiling, she's also the timekeeper.

  • Throughout this process, she will raise two kinds of alarms: Warning how close the U.S. is to an actual default, and how catastrophic a default would be for the U.S. and global economy.
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