Janet Yellen Warns of Default! Income Shock Could Lead to Recession

US Treasury Secretary Janet Yellen stated that a default by the United States could result in an income shock and potentially lead to a recession.

US Treasury Secretary Janet Yellen, speaking at the Independent Community Bankers of America (ICBA) 2023 Capital Summit, highlighted that a default by the United States could lead to an income shock and potentially result in a recession. She addressed the debt ceiling crisis in the country during her speech.

Yellen emphasized that the progress made by the US economy in recent years has been a result of collaboration between the government and other economic stakeholders. She also highlighted the increased confidence in the banking system and the control of deposit outflows through measures taken following the bankruptcies of two major regional banks in March.

Yellen expressed that they will take further precautions when necessary, stating that the measures taken to protect deposit holders and provide additional liquidity to the system have reduced financial risks. However, she mentioned that they are closely monitoring the situation and remain vigilant against potential disruptions.

“It is not possible to predict exactly when debts will become unpayable.”

Jannet Yellen

Yellen emphasized that it is not possible to predict exactly when the US Treasury will be unable to meet its debt obligations and mentioned that if Congress does not take action on the debt limit, they anticipate that the US will be unable to fulfill its debt obligations. Therefore, she underscored the need for Congress to address the debt limit as soon as possible.

Simulation Studies Have Yielded Negative Results

According to simulation studies on the impact of default, it has been revealed that the unemployment rate increases, consumer confidence declines, and the stock market value decreases significantly. According to the forecasts made by Moody’s Analytics, more than 8 million Americans could lose their jobs due to the impact of default, consumer confidence could suffer a serious blow, and the stock market value could drop by approximately 45 percent.

However, Yellen stated that this crisis is entirely preventable and the solution is simple. She emphasized that, as it has happened many times in the past, Congress should raise or suspend the debt limit. This way, it would prevent new expenditures while allowing the government to fulfill its existing commitments. Yellen also stated that if Congress fails to address the debt limit, the Treasury or the government does not have a good option to avert disaster.

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