Yellen has warned that the US could run out of money from June 1 | economy

The countdown is on and the end is near. If the US Congress doesn’t act this month, the consequences for the economy will be catastrophic, according to Treasury Secretary Janet Yellen. Yellen sent this Monday A letter to the Republican and Democratic leaders of the House of Representatives Urges them to approve or suspend the debt ceiling. If they don’t, the central government will run out of money to meet its obligations by June 1.

Political warfare is offered. Republicans, who hold the majority in the House of Representatives, want to impose cuts on Joe Biden’s administration in exchange for raising the debt ceiling, but have not endured the unpopularity of saying which ones. Additionally, they are demanding that Biden rescind some of his star activities since the middle of his term. Although it has no future in the Democratic-controlled Senate, they have passed a bill to do so.

The White House also sees it as threatening and is asking for the debt ceiling to be raised without conditions. Biden invited congressional leaders to whom Yellen’s letter was sent this Monday to a meeting at the White House next week, Tuesday, May 9. They are Gavin McCarthy, Speaker of the House of Representatives; Huckeen Jeffries, the Democratic leader in that chamber; The Senate consists of Democratic Leader Chuck Schumer and Republican Minority Leader Mitch McConnell in the Upper House.

The debt ceiling was reached in January and extraordinary measures gave the Treasury some cushion. The battle has no deadline until this Monday Yellen’s new letter. “After reviewing recent federal tax revenue, our best estimate is that we will not be able to continue to meet all of the government’s obligations in early June, and unless Congress raises or suspends the debt ceiling before the June 1. date,” he says.

Yellen explains that this estimate is based on currently available data because federal revenues and disbursements are inherently volatile, and points out that the actual date the Treasury will take extraordinary measures could be several weeks away. “We cannot predict with certainty the exact date when the Treasury will be unable to pay government bills,” he added.

The Treasury Secretary warns that action is needed soon: “We have learned from previous credit limit impasses that waiting until the last minute to suspend or increase the previous limit can seriously damage the confidence of companies. It would raise short-term borrowing costs for governments, consumers, and taxpayers, negatively impacting America’s credit rating,” he says.

In the past, even threats of a US government default have caused real damage, including the only downgrade in US history in 2011 when AAA lost.

The debt ceiling is the total amount of money the U.S. government is authorized to borrow to meet existing legal obligations, including Social Security and Medicare benefits, military pay, interest on the national debt, tax refunds, and other payments. It is currently pegged at $31.381 trillion.

“If Congress does not raise the debt ceiling, it will cause severe hardship to American families, harm our global leadership position, and raise questions about our ability to protect our national security interests,” the Treasury secretary said in his letter.

In an extreme case, the central government’s inability to borrow could lead to an unprecedented debt default that would roil markets and plunge the country into recession.

Instead of defaulting on debt, the U.S. could try to implement creative solutions to avoid exceeding the limit. For example, issuing loans with low face value but very high interest rates. Thereby, more resources can be obtained without exceeding the nominal value of the outstanding loan. The possibility of issuing a multi-million dollar bill or coin is considered a theoretical hypothesis. All of these alternatives have drawbacks, but not as many as stopping debt payments.

The Treasury began taking extraordinary measures in January, but continues to act to buy time. Yellen has announced that the State and Local Government Series (SLGS) will suspend the issuance of Treasury bonds. SLGS are special purpose treasury bonds issued to help states and municipalities meet certain tax rules. When Treasury issues SLGS, they are discounted from the credit limit. The Treasury notes that the move is to manage the risks associated with the debt ceiling, “but it is not without costs, as it will deprive state and local governments of an important tool for managing their finances.”

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