Janet Yellen to Take 'Extraordinary Measures' to Prevent U.S. From Debt Default

Treasury Secretary Janet Yellen said she will take "extraordinary measures" to prevent the U.S. from a default on the national debt unless Congress acts to suspend or increase the debt limit, she warned Congressional leaders in a letter Friday.

Yellen said the U.S.' "outstanding debt" will be at its statutory limit on August 1 and additional measures will be taken if the debt limit is not suspended or increased by August 2. The Treasury announced a suspension of the sale of state and local government securities, that increases the federal government's debt level, according to the Associated Press, and will take effect on July 30. For two years, the debt limit has been suspended. Currently, the debt bound by the limit is at $28.4 trillion.

If Congress does not agree to suspend or heighten the debt limit on August 2, the "Treasury will need to start taking certain additional extraordinary measures in order to prevent the United States from defaulting on its obligations," Yellen said.

A debt default has never been permitted by the government, White House Secretary Jen Psaki told reporters Friday, saying the possibility would be a "catastrophic event."

"Increasing or suspending the debt limit does not increase government spending, nor does it authorize spending for future budget proposals; it simply allows Treasury to pay for previously enacted expenditures," she added.

Yellen noted the U.S.' current debt level is a result of spending and tax decisions made "by Administrations and Congresses of both parties over time."

For more reporting from the Associated Press, see below.

Yellen said a default would cause "irreparable harm to the U.S. economy and the livelihoods of all Americans."

In her letter, she said her actions will buy time until Congress can pass legislation to either raise the debt limit or suspend it again for a period of time.

The sale of state and local government securities is used by some local jurisdictions to meet some of their financing needs.

Yellen noted that even the threat of a debt default—something the United States has never done—triggered the country's first-ever credit downgrade. That came during a standoff between Republicans in Congress and the Obama administration in 2011 when the Standard & Poor's credit rating agency downgraded its rating on a portion of U.S. debt.

"That is why no president or Treasury secretary of either party has ever countenanced even the suggestion of a default on any obligation of the United States," Yellen wrote.

However, Senate Minority Leader Mitch McConnell threatened this week that all Republican senators would vote against extending government borrowing authority. He cited objections to President Joe Biden's plans for boosting domestic spending and raising taxes on the rich.

If that occurred, Senate Democrats would lack the 10 GOP supporters they'd need to overcome a Republican filibuster, or delaying tactics, and move such language through the 50-50 Senate with 60 votes.

Democrats haven't yet decided on a legislative strategy to deal with a debt-limit impasse.

But Yellen's letter could steer them toward putting a provision extending the debt limit into a bill Congress will have to approve before Oct. 1 to prevent a government shutdown that day. The regular spending bills financing federal agencies for the fiscal year that begins Oct. 1 are unlikely to have been enacted by then.

That tactic would dare Republicans to block a bill that, if rejected, could result in both a federal shutdown and a default. Most politicians would be averse to being blamed for such events, especially heading into an election year.

Responding to Mitchell's comments this week, Senate Majority Leader Chuck Schumer called them "shameless, cynical and totally political."

Yellen's reference to the use of "extraordinary measures" to allow the government to keep borrowing to meet its debt service obligations and make payments on such benefits as Social Security refers to a variety of book-keeping maneuvers past Treasury secretaries have used.

Those include disinvesting funds from accounts that pay pension benefits to government workers. Once the debt ceiling is dealt with, the funds that have been disinvested from various government accounts are replaced.

Yellen said the unusual circumstances surrounding the government's response to the coronavirus pandemic made it hard to predict when she will run out of maneuvering room. She said that under some scenarios, her ability to keep borrowing might come to an end soon after Congress returns from its August recess.

She said a particular challenge will come on Oct. 1, when government resources are expected to decline by about $150 billion due to large mandatory payments, including a required investment for Department of Defense-related retirement and health care support.

"We expect Congress to act promptly to raise or suspend" the debt limit and "protect the full faith and credit of the United States," Psaki told reporters.