Nigata: On Thursday, U.S. Treasury Secretary Janet Yellen urged Congress to increase the $31.4 trillion federal debt ceiling in order to prevent an unprecedented default that would send the world economy into a tailspin and jeopardise American economic dominance.
In remarks prepared for a press conference prior to a meeting in Japan with her counterparts from the Group of Seven (G7) rich nations, as well as India, Indonesia, and Brazil, Yellen issued the latest in a series of increasingly dire warnings.
The progress we've made in our pandemic recovery over the past few years would be in jeopardy if we experienced a default. And it would set off a global recession that would further set us back," she said. It would also run the risk of undermining American economic leadership on a global scale and cast doubt on our capacity to protect our interests in terms of national security.
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The U.S. economy could enter a recession, according to U.S. President Joe Biden, if Congress does not take action before the Treasury runs out of money to pay the government's bills, which could happen as early as June 1.
Yellen claimed that Republican brinkmanship on the matter amounted to a "crisis of our own making" and that just the threat of a default could cause the U.S. government's credit rating to be lowered, as happened during a debt ceiling fight in 2011.
Yellen noted that rates were already rising on debt due around June 1 and that it might lead to higher interest rates on credit cards, auto loans, and mortgages.
She referred to the possibility as "unthinkable," noting that the U.S. economy would take a "substantial" hit in addition to the effects on financial markets, institutions, and consumer confidence.
"All of these analyses show that we would fall into -- if this lasted for any meaningful period of time -- a very substantial downturn," she claimed.
Democratic presidential candidate Joe Biden maintains that Congress must raise the debt ceiling, which reflects previous federal spending, without restriction. But the House of Representatives' Republican majority has made significant budget cuts a condition of any debt limit increase.
In light of recent developments in the debt ceiling standoff, the U.S. president said this week that he might have to forgo travelling to Hiroshima to meet with G7 leaders next week. After their initial meeting on Tuesday, Biden is scheduled to meet with top Democratic and Republican congressional leaders once more on Friday.
The United States places a limit on the amount it can borrow, unlike the majority of developed nations. Legislators are required to raise that ceiling from time to time because the government spends more than it collects.
Yellen also outlined her top priorities for the G7 meeting, including longer-term initiatives to increase economic resilience and individual and group action to strengthen the global economy and lower inflation. She also reiterated her commitment to aiding Ukraine in defending itself against a Russian invasion.
Despite the dangers, Yellen claimed that the world economy was still doing better than many had anticipated six months prior, with most G7 nations experiencing a decline in annual headline inflation and improved growth projections.
After the failure of three regional banks, the United States had taken steps to increase public confidence in its banking system, according to Yellen, as well as passed legislation encouraging investment in infrastructure, renewable energy, and semiconductors.
The G7 members would coordinate their efforts to push for "timely and comprehensive" debt treatments for countries in debt distress, she continued, adding that aiding developing nations was also essential. China, the biggest sovereign creditor in the world, has been charged by Yellen with repeatedly delaying the implementation of such agreements.
Yellen also stated that she would collaborate with her G7 counterparts to increase domestic production of essential goods and support developing nations in increasing their participation in global supply chains in order to build longer-term economic resilience.
She explained that this involved assisting those nations to transition away from "exclusively extractive industries" and towards "activities that provide greater support for the domestic economy and employment."
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In order to raise private capital for infrastructure projects in developing nations, the G7 Partnership for Global Infrastructure and Investment, which aims to mobilise $600 billion in investments, Yellen said the work would build on the investments.
The G7, which includes the United States, Japan, Germany, Britain, France, Italy, and Canada in addition to the European Union, would continue to work to reduce geostrategic risks and thwart Chinese economic coercion, according to Yellen.