Yellen warns failure to raise debt ceiling could trigger 'economic catastrophe'

Treasury secretary: Debt default could precipitate 'historic financial crisis'

Treasury Secretary Janet Yellen renewed her call for Congress to raise or suspend the nation's debt before October, warning that failure to do so could trigger an unprecedented financial crisis in the U.S.

"The U.S. has always paid its bills on time," Yellen wrote Sunday in a Wall Street Journal op-ed. "But the overwhelming consensus among economists and Treasury officials of both parties is that failing to raise the debt limit would produce widespread economic catastrophe."

WHAT IS THE DEBT CEILING?

The Treasury Department began implementing so-called extraordinary measures to keep the government running after the debt limit was reinstated in August around $22 trillion – about $6 trillion less than the actual level. Yellen has told Congress the federal government will run out of cash to pays its bills sometime in October.

The battle to raise the government's borrowing limit carries big risks for the broader economy: With the total debt standing at $28.5 trillion, the government would be forced to slash federal aid programs unless the cap is either suspended or lifted.

But lawmakers are at an impasse over the debt ceiling: Democrats are pressuring Republicans to support an effort to raise or suspend the ceiling, adamant that they won't stick it in a partisan $3.5 trillion spending bill. But Senate Minority Leader Mitch McConnell has rejected an appeal by Yellen to raise the ceiling, arguing that Democrats have the ability to go it alone. 

"Let’s be clear: With a Democratic President, a Democratic House, and a Democratic Senate, Democrats have every tool they need to raise the debt limit. It is their sole responsibility," McConnell tweeted last week. "Republicans will not facilitate another reckless, partisan taxing and spending spree."

WHITE HOUSE SOUNDS ALARM ON DEBT CEILING, WARNS MEDICAID, FOOD STAMPS AT RISK

President Biden has countered that Democrats joined with GOP lawmakers three times under the Trump administration to suspend the limit, and that the rising deficit is due to Republican spending. He's argued the sweeping tax and spending package Democrats are still crafting will be fully paid for. 

"Let me remind you, these are the same folks who just four years ago passed the Trump tax cut," Biden said in Thursday remarks at the White House. "It just ballooned the federal deficit." 

The House is slated to hold a vote this week on a measure to suspend the debt limit and a separate short-term measure to extend the government's funding beyond its expiration on Sept. 30. 

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The game of brinkmanship on Capitol Hill has alarmed Wall Street analysts and traders, with the Dow Jones Industrial Average plunging 586 points, or 1.7%, on Monday. The S&P 500 index fell 1.69%, and the Nasdaq Composite Index dropped 1.99%.

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If the U.S. failed to raise or suspend the debt limit, it would eventually have to temporarily default on some of its obligations, which could have serious and negative economic implications. Interest rates would likely spike, and demand for Treasurys would drop; even the threat of default can cause borrowing costs to increase.

"The U.S. has never defaulted. Not once," Yellen wrote. "Doing so would likely precipitate a historic financial crisis that would compound the damage of the continuing public health emergency.