US Treasury Secretary Janet Yellen warned recently that a government debt default would be catastrophic for the US economy, causing mass unemployment, payment defaults and a "perpetual" rise in interest rates.
She stressed the importance of the United States paying its bills on time since 1789 and urged Congress to act immediately to raise or lift the debt limit.
De agreement with Janet Yellen, a debt default would likely result in the government failing to make major military and pension payments, she speculated, and would cause mass layoffs of government officials. Families would also likely default on mortgage, car and credit card payments, causing US credit markets to collapse.
In this context, Democratic Representative Jim Himes mentioned that stocks may need to fall for Congress to resolve the debt ceiling crisis as Republicans are focused on spending cuts. He compared the current situation to the 2008 Troubled Assets Relief Program (TARP), which was passed only after a significant drop in markets.
The US government hit its $31,4 trillion debt ceiling in January, and the Treasury is expected to run out of cash by the summer. While House Speaker Kevin McCarthy has proposed a deal involving spending cuts, the Biden administration has opposed any reductions. In this political stalemate, credit default swaps on US debt reached their highest level in over a decade.
