Ahead of Biden-McCarthy Meeting... Yellen Warns "US Default Would Trigger Great Depression-Level Recession"

"It could lead to a severe economic recession like the Great Depression." On the 16th (local time), ahead of the second meeting between U.S. President Joe Biden and House Speaker Kevin McCarthy regarding the debt ceiling, Treasury Secretary Janet Yellen once again issued warnings about a potential default.

On the day of the scheduled meeting between the White House and congressional leaders, Yellen attended an event hosted by the Independent Community Bankers of America (ICBA) and stated that if the debt ceiling is not raised promptly, the government could face a default as early as the 1st of next month.

[Image source=Reuters Yonhap News]

She warned, "A U.S. default would cause an economic and financial disaster," and that it would roll back the historic economic recovery the country has achieved over the past several years. She explained that failing to pay over 60 million Americans who rely on Social Security would immediately reduce household incomes and lead to a recession. She also noted that it would become difficult to pay the salaries of federal workers responsible for air traffic control, border security, and national defense.

Yellen emphasized the influence of the U.S. Treasury market and predicted that if the U.S. fails to pay principal and interest on its debt on time, a global panic would be inevitable. She referenced an analysis by the White House Council of Economic Advisers, which stated that if a default lasts more than three months, the stock market could plunge by 45% and up to 8.3 million jobs could be lost. Earlier, Moody’s also expressed concerns that a default could reduce the gross domestic product (GDP) by 4% and eliminate 6 million jobs.

Yellen reiterated, "It could lead to a severe economic recession like the Great Depression," and stressed, "There is no time to waste. Congress must resolve the debt ceiling issue as soon as possible."

Concerns are mounting in the market as well. There is growing apprehension that a congressional deadlock over raising the debt ceiling could escalate to a repeat of the August 2011 situation, which led to a sharp stock market decline and a downgrade of the national credit rating.

Especially if no breakthrough emerges from the discussions scheduled for the afternoon between President Biden and congressional leaders, the fear of default is expected to intensify further. The U.S. exhausted its $31.4 trillion debt ceiling on January 31 and has since used extraordinary measures to buy time for negotiations, but those measures are now nearing their limit. With the Senate scheduled to recess for Memorial Day from May 22 to 29, the deadline is becoming even more urgent. The X-day, when cash runs out as warned by Secretary Yellen, is June 1.

Market observers predict that even if the worst-case scenario of default is avoided, the closer the X-day approaches, the more inevitable the repercussions such as a sharp stock market decline will be. Moreover, the U.S. economy is already facing recession concerns due to over a year of aggressive tightening by the Federal Reserve and recent events like the Silicon Valley Bank (SVB) collapse. Yellen warned again yesterday afternoon that a default would inevitably cause a global panic including financial market collapse and recession.

This content was produced with the assistance of AI translation services.