Yellen warns default on national debt would cause recession

Yellen warns default on national debt would cause recession
© Greg Nash

Treasury Secretary Janet YellenJanet Louise YellenBlowing up the Death Star would cause an economic crisis (and other reasons employers shouldn't pay off workers' college debt) Buttigieg has high name recognition, favorability rating in Biden Cabinet: survey Biden's spending binge makes Americans poorer, just before the holidays MORE warned Tuesday that the U.S. would likely fall into another recession if Congress is unable to raise the federal borrowing limit before Oct. 18.

In an interview with CNBC, Yellen reiterated her concerns about the U.S. facing a “catastrophic” economic crisis as Republicans continue to block measures to suspend the debt ceiling with less than two weeks until a default.

“It would be catastrophic to not pay the government's bills, for us to be in a position where we lack the resources to pay the government's bills. It really undermines confidence in the full faith and credit of the United States, our willingness to stand behind our debts and make sure that we pay them,” Yellen said on CNBC’s “Squawk Box.”

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“I fully expect it would cause a recession as well.”

Yellen has pleaded with lawmakers for months to raise or suspend the federal debt limit and allow the Treasury to begin issuing new bonds to generate more cash. The debt ceiling was reimposed Aug. 1 after a two-year suspension signed by former President TrumpDonald TrumpStowaway found in landing gear of plane after flight from Guatemala to Miami Kushner looking to Middle East for investors in new firm: report GOP eyes booting Democrats from seats if House flips MORE expired without any action from Congress.

The secretary warned lawmakers last week that the Treasury will run out of the cash and accounting measures necessary to keep the U.S. solvent on Oct. 18. At that point, the U.S. is expected to default for the first time in its history.

Raising the debt limit does not affect the size of the national debt or future congressional spending. It simply allows the Treasury to pay expenses already authorized by the president and Congress over several decades.

While Republicans raised the debt limit three times under Trump while adding trillions to the debt with Democrats, GOP senators have refused to allow Democrats to vote on a debt limit suspension. Instead, Republicans are pushing to make Democrats raise the debt ceiling through the budget reconciliation process in order to make keeping the country solvent as difficult as possible for their opponents. 

"Republicans' position is simple. We have no list of demands. For two and a half months, we have simply warned that since your party wishes to govern alone, it must handle the debt limit alone as well," Senate Minority Leader Mitch McConnellAddison (Mitch) Mitchell McConnellRepublicans seem set to win the midterms — unless they defeat themselves Graham emerges as go-to ally for Biden's judicial picks Five reasons for Biden, GOP to be thankful this season MORE (R-Ky.) wrote in a Monday letter to President BidenJoe BidenGOP eyes booting Democrats from seats if House flips Five House members meet with Taiwanese president despite Chinese objections Sunday shows preview: New COVID-19 variant emerges; supply chain issues and inflation persist MORE.

Republicans have tied their refusal to raise the debt ceiling to Biden’s goal of passing a multitrillion-dollar social services and climate bill through the reconciliation process. But the debt ceiling must be raised to pay off trillions of debt already added to the ledger, including the $1.9 trillion GOP tax cut, regardless of Congress’s future spending decisions.

"The longer this goes on, the more at risk we are," said Christopher Russo, a research fellow with George Mason University’s Mercatus Center, a libertarian-leaning think tank.

"The government's position only gets worse by the day. There's not going to be some surprise corporate tax revenue we weren't expecting a few days from now."

GOP senators have refused to allow Democrats to raise the debt ceiling with a simple majority through a normal piece of legislation, and are expected to filibuster another bill to raise the debt ceiling Wednesday.

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While Democrats could pass a bill to suspend the debt ceiling with only 51 votes if Republicans don’t filibuster, forcing Democrats to go through reconciliation makes for a longer, more volatile process and one that can only be used to raise the limit to a specific level, not waive it until a future date.

“It’s really noteworthy that none of McConnell’s demands have anything to do with fiscal substance — they’re all essentially about legislative procedure. Whereas Republicans in 2011 were obsessed with locking in cuts to spending, Republicans today are just determined to allocate responsibility for rising debt to Democrats,” wrote Phil Wallach, senior fellow at the right-leaning American Enterprise Institute think tank, in an email.

“That may be a good political strategy, but it’s striking what a shift it represents in our fiscal environment.”

Speaker Nancy PelosiNancy PelosiFive reasons for Biden, GOP to be thankful this season Bipartisan success in the Senate signals room for more compromise The GOP's post-1/6 playbook is clear — and it's dangerous MORE (D-Calif.) and Senate Majority Leader Charles SchumerChuck SchumerSchumer mourns death of 'amazing' father Feehery: The honest contrarian Biden administration to release oil from strategic reserve: reports MORE (D-N.Y.) have both ruled out using reconciliation to raise the debt limit. The two Democratic leaders have ripped Republicans for playing a dangerous game with the U.S. economy and have refused to cave to his demand.

Even so, Biden has not closed the door on reconciliation and several Democratic senators have acknowledged it may be the only viable way to raise the debt limit. Budget experts say Democrats could raise the debt ceiling in time to avert a default if they begin the process as soon as possible, but may still need McConnell to keep GOP hard-liners from roiling the process.

“I believe that both parties have a responsibility to get this done and it's really up to the Congress to decide how to manage it, but I believe it must be done,” Yellen said.

“To create periodic crises, manufactured crises that really place our economy and our financial system at risk, especially now that we're recovering from the pandemic in a fragile way, I consider this irresponsible.”

But Yellen shot down non-legislative ways around the debt ceiling, including the minting of a $1 trillion platinum coin under an expansive seigniorage that would be deposited at the Federal Reserve as a payment on the debt. The platinum coin idea has gained support among some left-leaning lawmakers, legal experts and economists — including Paul Krugman — but has been ruled out by the Biden administration.

“I'm opposed to it and I don't believe that we should consider it seriously. It's really a gimmick, and what's necessary is for Congress to show that the world can count on America paying its debts,” said Yellen, who chaired the Fed from 2014-18, arguing the move “compromises the independence of the central bank.”