CNBC’s Ylan Mui breaks down Treasury Secretary Janet Yellen’s latest comments from Capitol Hill. For access to live and exclusive video from CNBC subscribe to CNBC PRO: https://cnb.cx/2NGeIvi
Lawmakers have less than three weeks to raise the debt limit or risk a first-ever default, which would trigger a broad market sell-off and put a stranglehold on everything from government payments to the ability to borrow.
“It is imperative that Congress swiftly addresses the debt limit,” Treasury Secretary Janet Yellen said in remarks to the Senate Banking Committee.
Failing to act could spark an economic catastrophe, Yellen also said.
“Nearly 50 million seniors could stop receiving Social Security checks for a time. Troops could go unpaid. Millions of families who rely on the monthly child tax credit could see delays.
“In a matter of days, millions of Americans could be strapped for cash.”
The federal debt is the amount of money the government currently owes for spending on payments such as Social Security, Medicare, military salaries and tax refunds.
The debt limit allows the government to finance those existing obligations.
“Raising the debt ceiling doesn’t authorize additional spending of taxpayer dollars. Instead, when we raise the debt ceiling, we’re effectively agreeing to raise the country’s credit card balance,” Yellen has said.
In the worst-case scenario, the federal government would default, at least temporarily, on some of its obligations, including those Social Security payments, veteran’s benefits and salaries for federal workers.
Social Security, which was created in 1935, has never missed a benefit payment. However, checks could be delayed for weeks, or even longer, if Congress fails to either raise or suspend the debt limit, the National Committee to Preserve Social Security and Medicare recently warned.
Social Security is self-funded yet the program is drawing down from its trust funds, which include Treasury bonds, to pay benefits.
Potential downgrades of U.S. credit ratings would hammer Treasurys. Demand for U.S. Treasury bonds could sink if they are no longer considered a reliable, safe-haven investment and bondholders would demand dramatically higher interest rates to compensate for the increased risk.
That, in turn, would also send other borrowing costs higher, including credit cards, car loans and mortgage rates (which generally are pegged to yields on U.S. Treasury notes).
At the very least, fear of default could rattle the stock market and send shock waves throughout the economy, said Mark Hamrick, senior economic analyst at Bankrate.com.
“If you go back to a decade ago, there was an immediate selloff in the financial markets — it hit investors hard and runs the risk of a cascading financial crisis,” he said.
In 2011, a debt limit standoff in Congress brought the country very close to a default before lawmakers finally struck a deal, but not without a downgrade of the country’s credit rating and significant market volatility.
Between July and October of that year, the S&P 500 sank more than 18%.
This time, lenders may start tightening their standards in advance to reduce their exposure — or risk — during a contentious battle, said Yiming Ma, an assistant finance professor at Columbia University Business School.
“Just the uncertainty can impact borrowing terms and borrowing availability,” she said.
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