The US economy is hanging by a thread due to recession due to the debt limit

The US economy is hanging by a thread due to recession due to the debt limit

Reuters. – Paralysis in the federal debt reduction negotiations already has dire consequences for the US economy, increasing borrowing costs and the country’s debt burden, according to data prepared by US Treasury Secretary Janet Yellen, which she plans to do on Tuesday.

Yellen will pass the message on to a group of bankers in Washington, reminding them of the “last-minute gambit” over the debt ceiling in 2011 that led to America’s first credit rating downgrade.

“Time is running out. Every day that Congress fails to act, we see rising economic costs that can slow the American economy,” Yellen said in prepared remarks for an event hosted by the Independent Bankers Association of America.

The US economy is hanging by a thread. The livelihood of millions of Americans, too. No time to waste. Congress needs to address the debt limit as soon as possible.”

On Monday, Yellen told Congress that the Treasury Department would only be able to pay the country’s bills through June 1 without increasing the debt limit, piling pressure on Republicans in Congress and the White House to strike a compromise deal in the next few days.

US President Joe Biden is scheduled to meet at 1500 EST (1900 GMT) on Tuesday with Republican House Speaker Kevin McCarthy and three top congressional leaders to lay out a plan to prevent the first default in the country’s history.

Yellen said the 2011 crisis — when lawmakers raised the debt limit before the government stopped making payments — showed the dangerous repercussions of not acting sooner.

Consumer confidence then fell more than 20%, he said, while the S&P 500 stock index fell 17% and home and auto loan costs soared.

He said that allowing the United States to default would lead to economic and financial disaster, endangering the country’s reputation and undermining the foundations of the United States’ global economic leadership.

He said investors were already becoming more reluctant to hold public debt due in early June and that the stalemate was adding to the global debt burden.

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Yellen made an optimistic assessment of the health of community banks in the United States, noting that many of them posted higher net profits in 2022 than they did before the pandemic, although some regional banks have come under increasing pressure after the failure of two large banks. Regional Banks, Silicon Valley Bank and Signature Bank in March.

There have been some “aftershocks”, including the failure of the First Republic, according to Yellen, which however sees “no sign of change in the fundamental health of the banking system”.

The Treasury Department has remained vigilant and continues to monitor conditions closely, Yellen said, adding that the government is prepared to take further action if necessary, even if smaller institutions see deposit inflows that risk contagion.

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