Janet Yellen, the U.S. Treasury Secretary, said on Tuesday that if Congress doesn’t raise the government’s debt limit and the government defaults, it will cause a “economic catastrophe” that will make interest rates go up for years.
In prepared comments for a Washington event with business leaders from California, Yellen said that if the U.S. stopped paying its debts, people would lose their jobs and have to pay more on their mortgages, car loans, and credit cards.
She said that Congress had a “basic responsibility” to raise or remove the $31.4 trillion borrowing limit, and she warned that a default would threaten the economic progress the US has made since the COVID-19 pandemic.
“If we didn’t pay our debts, it would be a disaster for our economy and finances,” Yellen told members of the Sacramento Metropolitan Chamber of Commerce. “The cost of borrowing would go up forever if the debt wasn’t paid. It would cost a lot more to make investments in the future.”
She said that if the debt cap isn’t raised, the credit markets for U.S. businesses will get worse and the government will probably not be able to pay Social Security and military families.
“Congress must vote on whether to raise the debt cap or put it on hold. It should do this no matter what. And it shouldn’t wait until the last minute.”
In January, Yellen told lawmakers that the government would only be able to pay its bills until early June without raising the cap, which it had already reached in January.
The U.S. has a hard cap on how much it can borrow, which is different from most other developed countries. Since the government spends more than it brings in, politicians have to raise the debt limit from time to time.
Kevin McCarthy, the head of the Republican-controlled House of Representatives, proposed a plan last week that would cut spending by $4.5 trillion and raise the debt limit by $1.5 trillion. He said this would be the starting point for talks in the coming weeks.
The White House says the two issues shouldn’t be linked, and the Senate, which is run by Democrats, is expected to turn down the idea.
The standoff is making the financial markets more and more worried. As a result, the cost of insuring exposure to U.S. debt has risen to its highest level in a decade, and financial experts are warning about the growing chance that the U.S. will default.