1674966025 Yellen warns of debt brake quotcatastrophequot for the US and

Yellen warns of debt brake "catastrophe" for the US and beyond

A white-haired lady, Janet Yellen, scowls off into the distance

Secretary Yellen during a meeting with President of Zambia Hakainde Hichilema in Washington, DC. Photo: Kevin Dietsch/Getty Images

Treasury Secretary Janet Yellen told Axios she was “nervous” about the US default and warned that Americans are likely to face a scary and spreading recession if Congress doesn’t raise the debt ceiling this summer.

Why it matters: Yellen’s bleak financial outlook is part of the Biden administration’s attempt to put political pressure on the GOP majority of the new House of Representatives to raise the debt ceiling without delay or hesitation.

  • It’s also the unvarnished prediction of a former Fed Chair who sat ringside at the 2011 debt ceiling showdown when the credit agencies downgraded the US debt for the first time in American history.

What you say: “Of course it makes me nervous,” Yellen said at the end of a 10-day cross-continental trip to Axios of Johannesburg, South Africa. “It would be devastating. It’s a disaster.”

  • In the event of a default, “we will have a financial crisis,” she said. “And I think we would have a recession in the United States.”
  • If the government couldn’t take on new debt, the economy would spiral into a tailspin. “Spending would have to fall to match tax revenues,” Yellen said, depriving the government of any opportunity to use stimulus to stimulate the economy.
  • Then fear could erupt, making consumers too anxious to spend — a scenario Yellen described as “psychological fallout” that “could further affect spending and deepen a recession.”

Driving the news: The threat of a debt default has overshadowed Yellen’s trip to Africa, where on her first stop in Dakar she rejected a Republican proposal to prioritize debt payments.

Zoom in: Yellen’s trip was designed to convince Africans, including elected officials, business leaders and farmers, that the US wants a long-term relationship on everything from food security to rural electrification.

  • But the possibility of an American default reminded Yellen’s African hosts that the US is divided. Promises made by one political party are not guaranteed to be kept by the other.

Zoom out: Like Russia’s invasion of Ukraine, a wholesale US default would have global ramifications and make it more expensive to borrow money in some of the world’s poorest countries.

  • “Americans would face higher borrowing costs, and it would also cause a lot of uproar around the world,” Yellen said.

Between the lines: Yellen doesn’t seem keen on spending late nights negotiating the debt ceiling with new House Speaker Kevin McCarthy (R).

  • She is cautious in saying that all official negotiations will take place between the White House and Congress. “The President and the leadership of Congress are responsible for finding a way to raise the debt ceiling,” she said.

Be smart: By law, the Treasury Secretary is the nation’s accountant. She is also the timekeeper for the debt ceiling.

  • During this process, she will sound two sets of alarms: how close the US is to an actual default, and how catastrophic a default would be for the US and the global economy.