The United States’ trillion debt needs to keep getting bankrolled, else any progress made since the COVID-19 pandemic began will be for naught.
Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell warned US lawmakers that the economy could grind to a halt.
Yellen and Powell testified before the Senate Committee on Banking, Housing, and Urban Affairs about the progress that has been made in bringing the US back from the worst economic downturn since the Great Depression of 1929-1939.
They warned of dire consequences if US Congress didn’t pass a bill to fund the government and raise the country’s debt ceiling in October.
On September 27th, Senate Republicans blocked an emergency spending bill that would avert a government shutdown by October 1 and a federal debt default that is expected in mid to late October.
Such a default could jeopardise confidence in the US dollar as a global reserve currency, Yellen said, and delay Social Security payments, paycheques for military personnel and other government payments that large groups of Americans rely on to make ends meet.
“It is imperative that Congress address the debt limit,” Yellen said in her prepared testimony. “If not, our current estimate is that Treasury will likely exhaust its extraordinary measures by October 18. At that point, we expect Treasury would be left with very limited resources that would be depleted quickly. America would default for the first time in history. The full faith and credit of the United States would be impaired, and our country would likely face a financial crisis and economic recession as a result.”
Raising the debt ceiling is “necessary to avert a catastrophic event for our economy”, she added, pointing out that it has been raised or suspended 78 times since 1960 by lawmakers from both of the country’s major political parties.
Powell told lawmakers he agreed with Yellen’s assertion that should the US default on its debt, it would have “devastating” consequences.
“I think it’s essential to raise the debt ceiling in time to avoid payment defaults of any kind, and the potential effects could be severe,” Powell said.
In her testimony, Yellen called the recovery “fragile, but rapid”, while Powell testified that the “path of the economy continues to depend on the course of the virus, and risks to the outlook remain”.
On September 28th, the Conference Board published data which showed US consumer confidence hit a seven-month low in September “as the spread of the Delta variant continued to dampen optimism”, said Lynn Franco, the group’s senior director of economic indicators.
“Concerns about the state of the economy and short-term growth prospects deepened, while spending intentions for homes, autos, and major appliances all retreated again,” Franco said in a statement. “Short-term inflation concerns eased somewhat, but remain elevated.”
In their respective testimonies, Yellen and Powell emphasised that the US economic recovery was aided in large part by fiscal policy that helped avert a worse recession, including the $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act.
“In response to the crisis, we took broad and forceful measures to support the flow of credit in the economy and to promote the stability of the financial system at the onset of the pandemic,” Powell said in his testimony.
“Our actions, taken together, helped unlock more than $2 trillion of funding to support businesses large and small, non-profits, and state and local governments between April and December of 2020. This, in turn, helped keep organisations from shuttering and put employers in a better position to keep workers on and to hire them back as the recovery continues.”
Yellen and Powell’s appearance on Capitol Hill came at a critical time when Biden and Congressional Democrats are trying to rally support for more government spending in the form of two bills:
- the $550bn Bipartisan Infrastructure Deal;
- the Build Back Better Act, multitrillion-dollar legislation that would expand the US’s social safety net.
Urgent voting is needed since if not dealt with the US may go off a cliff and much of the world could follow.
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