US is heading for a financial ‘catastrophe’ US Treasury Secretary warns

The country hit the $31.4 trillion debt limit Congress passed in 2021. The Republican lawmakers who control the House of Representatives said they would not raise the debt limit unless Democrats, who control the Senate, agreed to budget cuts. The US national debt is approximately 122 percent of the gross domestic product (GDP), meaning that the government owes more than the population produces.

On Saturday, US Treasury Secretary Janet Yellen said the US could be facing dire consequences if it did not hike its statutory debt ceiling soon. A default on its debt by summer would lead to a financial crisis, Yellen warned.

“It makes me nervous…It would be devastating. It’s a catastrophe,” Yellen told Axios news outlet, adding that “we’ll have a financial crisis and I believe we would have a recession in the United States.”

“Spending would have to decline to match the tax revenues,” Yellen said. That in turn could cripple the ability of the government to support the economy with stimulus. Beyond that, the “psychological consequences” of people deciding to consume less could “further impact spending and deepen a recession.”

According to the senior official, a US debt default would also send ripple-effects across the global economy. “Americans would face higher borrowing costs, and it would cause a good deal of turmoil globally as well,” Yellen said. But the real reason the Fed cannot allow interest rates to rise anywhere near where they would be in a free market is that it would cause the federal government’s interest payments to rise to unsustainable levels.

Congress has been notified by the Treasury that emergency measures have been invoked to prevent the country from reaching the national debt ceiling. The measures largely involve temporarily suspending unnecessary payments in order to give the Congress time to negotiate and pass a debt limit hike, most likely until early June. Without the hike, default would be imminent, she warned.

But the irresponsible money printing by the Federal Reserve has led many to believe that the government should not increase its credit limit without cutting social spending.

US warning of a default

“The president and the leadership of Congress are responsible to find a way to get the debt ceiling raised,” she told Axios.

The debt ceiling prevents the US Treasury from issuing new government bonds to fund government expenditure. Exceeding the limit means that the federal government’s ability to make payments, including paying for various social expenditures, is at risk.

The debt limit therefore caps the total amount of allowable outstanding US federal debt. It is unlikely Congress will pass meaningful entitlement reform, however.

According to the Ron Paul Institute, a Republican spending plan “will likely continue increasing spending on the military-industrial complex while refusing to address the looming cost problems with Social Security and Medicare”.

Even if some Republicans are willing to discuss reforms to Social Security and Medicare, most are still too afraid of the “senior lobby”.

According to columnist Paul Craig Roberts, the current state of economic affairs has been the result of a “high level of incompetence that today rules Americans“.

Roberts has argued that the Fed’s interest rate policy for example could raise, rather than lower, inflation.

“Military spending is similar to welfare. The associated wages and salaries pump money into consumer demand, but there are no corresponding goods and services to absorb it. Consumers do not purchase tanks, missiles, fighter aircraft, and warships. The size of the US military budget makes it inflationary,” he pointed out.