In a letter to House Speaker Mike Johnson (R-La.), Treasury Secretary Janet Yellen suggested that the United States is on the precipice of economic calamity unless lawmakers act quickly in the coming weeks.
Yellen wrote on Friday that the United States will soon need to raise the statutory debt ceiling in order to stay current on its debt service obligations, and that the U.S. is in danger of defaulting on its debt as soon as January 14 unless new legislation is passed. In the letter — which was also addressed to other key congressional leaders like House Minority Leader Hakeen Jeffries (D-N.Y.), Senate Majority Leader Chuck Schumer (D-N.Y.) and Senate Minority Leader Mitch McConnell (R-Ky.) — Yellen hinted she may be forced to act within her capacity to stave off an economic crisis, though she didn’t elaborate further.
“Treasury currently expects to reach the new limit between January 14 and January 23, at which time it will be necessary for Treasury to start taking extraordinary measures,” Yellen wrote. “I respectfully urge Congress to act to protect the full faith and credit of the United States.”
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Johnson only narrowly managed to avoid a federal government shutdown last week by ushering through a bill guaranteeing 90 days of more government funding, though the bill took no action to raise the debt ceiling. President-elect Donald Trump unsuccessfully tried to abolish the debt ceiling entirely, calling on lawmakers to get rid of the statutorily imposed mechanism that was initially signed into law when the U.S. was still on the gold standard.
“The Democrats have said they want to get rid of it. If they want to get rid of it, I would lead the charge,” Trump said last week. “It doesn’t mean anything, except psychologically.”
Raising the debt ceiling doesn’t actually require any federal spending — it merely continues to guarantee the safety of the U.S. economy for institutional investors and foreign governments. Most of the national debt is actually just private sector wealth held in the form of U.S. Treasury securities. And because U.S. Treasury securities are guaranteed by the full faith and credit of the United States, wealthy investors generally prefer them to bank deposits, which are only guaranteed up to $250,000 by the FDIC. Should Congress fail to raise the debt ceiling in time, it would jeopardize the viability of U.S. Treasury securities, trillions of dollars in investments and potentially the global economy itself.
“”To the extent that the national debt is held domestically, it constitutes domestic private sector wealth,” the St. Louis Fed wrote of the national debt in 2020. “The extent to which it constitutes net wealth can be debated, but there’s not much doubt that at least some of it is viewed in this manner. The implication of this is that increasing the national debt makes individuals feel wealthier.”
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Click here to read Yellen’s letter in its entirety.
