Treasury Sec. said that there is nothing more harmful to the US Dollar than the failure to lift the debt ceiling. Yellen said Tuesday.
A default by the government would undermine trust in the dollar and make borrowing more costly in the US. It could also have a significant impact on international finance.
Congress is stuck in a deadlock over the limit and has only 20 days to fix it.
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For decades, the US dollar has been the reserve currency of the world. Trust in the US dollar's value is a key component of the US's economic strength. This trust is shared by governments and banks around the world.
Janet Yellen, Treasury Secretary, warned Tuesday that if Congress does not raise the debt ceiling in the next few weeks, it would cause severe damage to the dollar.
The October 18 deadline for Congress to suspend or increase the limit on the amount the government can borrow is fast approaching. This is because Congress has adjusted the ceiling 78 more times than it did in 1960.
A tense alliance between the GOP and Democrats could end this streak and force the government's default on its huge debt pile. In testimony before the Senate Banking Committee, Yellen stated that such an outcome would cause "a financial crisis" and "economic recession" and permanently damage the dollar's power.
The Treasury Secretary stated that "I cannot think of anything more damaging to the role of dollar than failing to increase the debt ceiling."
Everyday Americans would be affected by the fallout. Investors will expect higher returns from the US Treasurys if government borrowing exceeds the debt ceiling. This will cause interest rates to rise sharply and increase the cost of borrowing for Americans. Yellen stated that interest payments on mortgages and car loans would soar.
However, there is little progress toward a solution. Senate Republicans, led by Minority Leader Mitch McConnell, have stated that Democrats will need to raise the ceiling themselves. They argue such an action allows them spend irresponsibly large amounts of government cash. Democrats claim that the limit is only for past spending and that Republicans' spending during President Donald Trump has added trillions to government debt.
It is not the first time Yellen has raised the alarm about the debt-ceiling fallout. Hours before the Senate hearing, Yellen wrote to lawmakers setting October 18 as the deadline to resolve the debt crisis. She stated that the Treasury's "extraordinary" measures to pay the government's debts would expire by that date. The Treasury Secretary had previously warned that the ceiling would be reached in mid-October.
Yellen also wrote a September 20 column for The Wall Street Journal, which sheds more light on the dangers associated with a default government. She stated that failure to raise the ceiling would lead to "economic catastrophe" and have detrimental effects on the entire US economy.
"We could experience indefinite delays in critical payment payments. She said that nearly 50 million seniors could lose their Social Security checks at any given time. Troops could be unpaid. Millions of families that rely on the child tax credit monthly could face delays
Although Yellen has not yet addressed the larger implications of international finance, a loss in faith in the dollar reserve currency could have a significant impact on the global financial system.
There are still options for Democrats to lift the limit. A reconciliation measure that requires the support of all 50 Senate Democrats may be able to provide a temporary fix while Congress waits for an agreement.
The party still believes it can call the Republicans' bluff for now. Tuesday afternoon, the Senate will vote to raise the ceiling. If Republicans remain firm, Democrats will have only two options: either raise the ceiling or eliminate it altogether.
