Treasury Secretary Janet Yellen usually gets a good deal of media attention whenever the dramatic dramatic topic
of resolving the “debt ceiling
” comes up.
This week is no exception. Yellen warned, yet again, that severe economic consequences were imminent if the U.S. were suddenly not able to pay its bills:
“Our current projection is that in early June, a day will come when we’re unable to pay our bills unless Congress raises the debt ceiling, and it’s something I strongly urge Congress to do,” Yellen told ABC’s “This Week.”
Yellen said the U.S. has already been using “extraordinary measures” to avoid default, and it’s not something the Treasury Department can continue to do. She said Congress needs to take action to avoid “economic calamity.”
“It’s widely agreed that financial and economic chaos will ensue,” Yellen said.
In fact, Treasury Secretary Yellen is panicking over the June deadline. Now she is personally dialing an unknown list of financial-sector executives to warn them.
The Biden administration is pressuring GOP lawmakers into raising the debt ceiling while leaving Biden’s apparent blank check for spending intact:
The Treasury secretary is having one-on-one conversations with individual CEOs to warn them about the "dangerous consequences of the current brinkmanship," one of the sources said.
The sources declined to name the CEOs with whom Yellen had spoken in recent days, or provide any other details about their conversations, but one said they included executives in the financial sector and broader economy.
While the sources did not spell out her purpose, Biden administration officials have been speaking to business owners about pressuring Republicans to raise the debt ceiling without conditions. [emphasis added]
In fact, the Treasury Secretary also disapproves of any spending cuts at all while Congress attempts to resolve the debt ceiling fiasco.
Yellen scorns fiscal discipline, calls spending cuts “irresponsible”
Yellen recently scolded the GOP for trying to negotiate a pause in spending while resolving the debt ceiling:
Treasury Secretary Janet Yellen said in an interview published Sunday that Republican calls for spending cuts in exchange for agreeing to raise the debt ceiling were “very irresponsible.”
Yellen said the GOP’s stance on the debt ceiling could have far-reaching consequences for the economy.
She also warned: “It is possible for markets to become quite concerned about whether or not the U.S. will pay its bills.”
The article offered a counterpoint explaining the GOP's reasoning, and one consequence of delaying a debt ceiling decision:
The Biden administration has warned that an extended standoff over the debt ceiling could destroy faith in the credit of the U.S. government and spur a deep economic recession.
Of course, we don’t know exactly how this political drama will play out. We’ll have to wait and see what happens. But it looks like there will be consequences if some form of resolution isn’t reached soon.
Even a near-miss on default could be a disaster
The consequences of a debt default are easy to imagine.
In addition to a deeper recession than the one already on the way (according to the Fed), there could be:
- Millions of jobs lost
- A severe reduction in GDP
- Massive credit contraction and systemic financial strains
In fact, the White House analysts put together a similar projection if a protracted (long-term) default were to happen. Here are the consequences that could happen as early as the third quarter this year.
Take notice of the column labeled “Short Default,” which might leave you thinking that a brief default wouldn’t be all that bad, if the debt limit didn’t get increased in time to keep paying the bills…
…except things would get bad in a hurry. Here’s why even a brief default could set catastrophic ripple effects in motion:
Mark Zandi, Chief Economist of Moody’s Analytics, predicted that even with a brief default, a “crisis, characterized by spiking interest rates and plunging equity prices, would be ignited. Short-term funding markets, which are essential to the flow of credit that helps finance the economy’s day-to-day activities, likely would shut down as well.”
According to Moody’s, even a short debt limit breach could lead to a decline in real GDP, nearly 2 million lost jobs, and an increase in the unemployment rate to nearly 5 percent from its current level of 3.5 percent.
Moody’s also notes that even a short debt limit breach could lead to lastingly higher interest costs: “If Treasury securities are no longer perceived as risk-free by global investors, future generations of Americans would pay a steep economic price.”
A Brookings analysis noted that losing the unparalleled safety and liquidity of the Treasury market due to default could translate into over $750 billion in higher federal borrowing costs over the next decade.
Peterson Institute economists have argued that lower demand for Treasuries would weaken the dollar’s role in the global economy: “This weakening of official dollar purchases would likely increase volatility in the dollar’s value against other currencies and decrease liquidity, prompting investors to reduce their holdings of dollars in any form.” [emphasis added]
So even a brief default could permanently destroy the perception of the U.S. government as a responsible borrower. This would severely weaken the dollar’s role in global commerce, and cause short-term credit markets to grind to a halt (just like in 2007-08).
And that’s just the tip of the iceberg! At the same time, the economy would plunge into a deep recession and pretty much all federal government operations would shut down.
I’m starting to think maybe Yellen is right to panic…
There’s one asset that can’t default
During times of extreme political drama and massive economic uncertainty like today, it’s a good idea to consider your long-term financial situation. Are your savings diversified enough to ensure you have a financial future, regardless whether chaos engulfs the economy?
Trust me on this: trying to outguess the bureaucrats is a waste of time. It’s better to hope for the best while you prepare for the worst.
One thing you can do right now: Take just a few minutes to familiarize yourself with physical precious metals like gold and silver. Precious metals can’t default, by definition. They’re just about the only asset that isn’t an IOU or a promise to pay.
Take some time today to discover why gold is historically considered a safe haven during times of economic uncertainty and political upheaval.
Peter Reagan is a financial market strategist at Birch Gold Group. As the Precious Metal IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver. Based in the Los Angeles area, the company has been in business since 2003. It has an A+ Rating.
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