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Peter Davis

An writer at FOMOdrive

  • May 12, 2023
  • 3 min read

Treasury warns of catastrophe if US defaults

A painful US default is being anticipated by markets.

Yellen, the US Treasury Secretary, cautioned that a default on public debt could lead to disastrous consequences.

President Trump urged members of Congress to permit the United States to default on its obligations.

President Biden declared, "If this is the case, the entire globe will be in peril."

Bloomberg reports that US Treasury Secretary Janet Yellen has warned of an economic disaster if the US national debt limit is not raised, as it has already exceeded the established limit. She said that a default in the US could occur in June if the debt limit is not increased.

A recession in the global economy could be caused by a default, which would also weaken US leadership in the world and raise questions about its ability to safeguard its national security interests.

Yellen suggested that Congress could have taken an alternate approach to the debt ceiling issue, such as repealing it altogether.

If the White House does not agree to make concessions and cut the country's budget, ex-President Trump has called for a default in the United States. He believes, however, that the Democrats will eventually give in and meet all the demands of the Republicans.

Regarding the default, Trump stated: "Let it happen, as it would be better than our current situation, as we are spending money recklessly."

On Wednesday, President Biden dismissed the risk of default as an "artificial crisis," but acknowledged the potential consequences of high interest rates, delayed social benefits, and rising unemployment if Washington does default. He warned that "the whole world will be in trouble" in such a scenario.

He warned that if a default were to occur, the economy would take a nosedive into recession, the US's international standing would be greatly damaged, and this situation is not even worth contemplating.

The 14th Amendment to the Constitution allows the President of the United States to increase borrowing without the approval of Congress' debt limit. However, the Ministry of Finance has warned of the potential for a constitutional crisis if this scenario is pursued, and thus should be avoided.

Bloomberg reports that investors are bracing themselves for a potential US default, which, while still unlikely, is no longer inconceivable.

Pimco reported that, in the past 10 years, the S&P 500 has dropped an average of 6.5% in the month prior to the debt ceiling deadline. Despite this, the issue has always been resolved.

If a default were to occur, the consequences would be dire. In 2013, the Federal Reserve conducted a simulation to measure the effects of a month-long default during a prior debt ceiling dispute. The results showed that stock prices would drop by 30% and the value of the dollar would decrease by 10%.

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