Roundup: U.S. partisan standoff over debt ceiling poses risk of default, higher inflation

0 Comment(s)Print E-mail Xinhua, January 21, 2023
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by Matthew Rusling

WASHINGTON, Jan. 20 (Xinhua) -- U.S. Treasury Secretary Janet Yellen appeared Friday on CNN to warn of international consequences if the federal government fails to raise the debt ceiling, with both the Democrat and Republican parties in a standoff.

After her department's "extraordinary measures" are exhausted, the United States could experience a downgrading of its debt as a result of Congress failing to raise the debt ceiling, Yellen told CNN.

Earlier this week, U.S. debt rose to over 31.4 trillion U.S. dollars, the limit set by Congress over a year ago, prompting the Treasury Department to take "extraordinary measures" to continue financing the federal government.

In a letter to House Speaker Kevin McCarthy, Yellen said there would be "considerable uncertainty" should Congress fail to pass legislation to increase the debt ceiling, namely the maximum amount the U.S. government can borrow.

However, the standoff between the two parties has sparked concerns over a possible debt default. Republicans, who now control the House by a slim margin and want any deal on raising the debt limit to be tied to spending cuts, are pushing Democrats to negotiate over the debt limit.

Democrats refuse to budge, setting up an impasse between the two bitterly divided sides.

If the federal government fails to make payments, "our borrowing costs would increase, and every American would see that their borrowing costs would increase as well," Yellen told CNN.

A failure to make payments that are due "would undoubtedly cause a recession in the U.S. economy and could cause a global financial crisis," she added.

"The U.S. clearly has a public spending problem," as seen in "the steady rise in its public debt to GDP ratio to its highest level in the post-war period and in the large size of its unfunded social security obligations," Desmond Lachman, senior fellow at the American Enterprise Institute and a former official at the International Monetary Fund, told Xinhua.

The danger, however, is not only in defaulting but rather in untamed inflation.

"The U.S. government borrows in the country's own currency. This means that the U.S. government can always avoid default by having the Federal Reserve print the dollars necessary to cover the government's borrowing needs," Lachman said.

"The real long-run problem for the U.S. is that if it does not soon get a handle on its public finances, it could have a real long-run inflation problem," he said.

Currently, U.S. inflation, particularly food inflation, shows no substantial signs of weakening amid the worst price hikes in 40 years. Enditem

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