October 4, 2023

U.S. Treasury Secretary Janet Yellen answers questions during the Senate Fund Allocation Subcommittee hearing to consider the Treasury Department’s budget proposal for fiscal year 22 on Capitol Hill in Washington, DC, June 23, 2021.

Greg Nash | Swimming pool | Reuters

Treasury Secretary Janet Yellen on Friday warned Congress that if lawmakers fail to reach an agreement to raise or extend the debt ceiling, her department must take “extraordinary measures” on August 2 to prevent the US government from defaulting.

In a letter to House Speaker Nancy Pelosi, D-California, Yellen warned lawmakers that in late July the Treasury Department would suspend the sale of bonds that the US uses to finance its debt.

After August 2nd and subject to a debt limitation agreement, the Treasury Department will take “extraordinary measures” to settle Congressional legal and financial obligations, a temporary fix that will allow the Secretary to tap additional government accounts for a period of weeks.

“The period in which extraordinary measures may persist is subject to significant uncertainty due to a variety of factors, including the challenges of forecasting US government payments and revenues months into the future, exacerbated by the increased uncertainty surrounding payments and revenues Revenue related to payments and revenue related to the economic impact of the pandemic, “Yellen said in a letter to Pelosi.

The message between the Treasury Secretary and the House Speaker is a required formality if US outstanding debt is approaching its legal limit. While the extraordinary measures have been taken in the past to prevent a default, it is unclear how long Yellen’s emergency capital will last given the unprecedented stimulus measures sparked by the Covid-19 crisis.

While the United States has never defaulted on its debts, recent history shows that uncomfortable proximity to chaos can lead to chaos. In 2011, Republicans’ refusal in the House of Representatives to raise the debt ceiling resulted in a downgrade in the credit rating of US Treasuries, which angered the financial markets.

Economists say that a default, while extremely unlikely, would be a catastrophic event and pose a significant threat to several sectors of the American economy.

When asked about Yellen’s letter, White House press secretary Jen Psaki insisted that the notice should be viewed in context and noted that similar letters had been sent in previous governments.

The letter is “standard practice for finance ministers when a debt limit is reinstated,” said Psaki on Friday afternoon. “During the last two administrations, the Treasury Secretary has sent nearly 50 letters to Hill on the debt line, some of which were very similar in wording and requests and updates.”

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