(Bloomberg) -- Treasury Secretary Janet Yellen warned that “time is running out” to avert an economic catastrophe from failing to raise the debt ceiling, speaking before Tuesday’s meeting between President Joe Biden and congressional leaders on the standoff.
On Tuesday morning, Speaker Kevin McCarthy said there had been “no progress” in talks overnight ahead of the 3 p.m. gathering. On Monday he warned, “We only have so many days left to deal with this.”
The two sides showed little signs of agreeing on much else other than the countdown in the runup to the second White House encounter on the debt ceiling in two weeks. While senior staff have been negotiating for days, Republicans are still pressing for sweeping spending cuts, while Democrats are determined to protect the president’s legislative achievements.
“We are already seeing the impacts of brinksmanship: investors have become more reluctant to hold government debt that matures in early June,” Yellen said in remarks to a banking conference on Tuesday. “The impasse has already increased the debt burden to American taxpayers.”
The Treasury chief issued a fresh letter to congressional leaders Monday restating that the Treasury risks running out of sufficient cash for all federal obligations as soon as June 1. The livelihoods of millions of Americans “hang in the balance,” she said in excerpts of her speech to the Independent Community Bankers of America Capital Summit released by the Treasury.
“Every single day that Congress does not act, we are experiencing increased economic costs that could slow down the US economy,” Yellen said.
Biden and McCarthy have been at an impasse since January over raising the government’s $31.4 trillion borrowing limit. Economists have cautioned that US default risks triggering a market selloff, a surge in borrowing costs and a blow to the global economy that could rival the 2008 crash.
McCarthy emphasized that staff-level meetings are “not productive at all” and that negotiations were “not in a good place.”
Tuesday’s gathering comes a day before Biden is expected to depart for Asia, in a trip intended to showcase US determination to address strategic competition with China. White House officials said Monday that the plans to attend the Group of Seven summit in Japan, with stops in Papua New Guinea and Australia, had not changed despite the ongoing debt talks.
Biden Trip
Asked whether the president should go abroad at this point, McCarthy said, “I think an American president should focus on the solutions for America. I think it shows your values and priorities.”
People familiar with the meetings have said that the White House has pushed to exclude elements of the bill passed by House Republicans last month — including eliminating the president’s program to forgive some student loans, as well as signature legislative accomplishments — from discussions.
Republicans rejected a Democratic proposal that would seek to raise revenue — and decrease future deficits — by altering a dozen provisions of the tax code, including a loophole that allows investors in cryptocurrency to claim losses on assets that they then purchase. Democrats also proposed eliminating a loophole that allows large real estate investors to effectively receive interest-free financing from the government.
Those tax offerings were part of Biden’s budget proposal earlier this year. The White House offered to bring Republicans additional proposals but were told that the GOP would not consider any effort to raise taxes, according to the people familiar.
Default Consequences
Last week, Representative Dusty Johnson of South Dakota, one of the authors of the House bill, said the GOP has three red lines: no clean debt increase, no tax increase, and the bill must reduce the deficit.
Yellen, in her Tuesday remarks, gave detailed warnings on failing to address the debt ceiling, including:
- A default would “crack open the foundations” of the global financial system. “It is very conceivable that we’d see a number of financial markets break – with worldwide panic triggering margin calls, runs, and fire sales.”
- Recipients of Social Security and veteran benefits would see their checks stop, causing “widespread suffering.”
- Essential operations like air traffic control, law enforcement, border patrols and national defense could be disrupted.
- The Council of Economic Advisers estimates an economic downturn as severe as the Great Recession of 2007-09, with more than 8 million jobs lost and a 45% wallop to the value of the stock market.
She also addressed the recent banking turmoil in the US. Speaking after the failures of several regional banks in quick succession over the past two months, she reiterated that American deposits remain safe.
“Recent banking troubles including the resolution of First Republic are not a sign of any shift in the fundamental health of the US banking system,” Yellen said.
“Americans should rest assured that their deposits are safe. Their deposits will be there when they need them.”
--With assistance from Billy House and Christopher Condon.
(Updates with McCarthy in second paragraph)
©2023 Bloomberg L.P.
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