A US debt default could spark mass unemployment, payment failures, and catastrophe that would raise interest rates ‘into perpetuity,’ Treasury Secretary Janet Yellen warns

• A US debt default would be a disaster for the economy, Treasury Secretary Janet Yellen said.

• She warned of potential mass unemployment, payment failures, and broad economic weakness if the US failed to pay its debts.

• She urged lawmakers to raise the debt ceiling and not wait “until the last minute” to do so.

A government debt default would be catastrophic for the US economy, sparking mass unemployment, payment failures, and interest rates rising “into perpetuity,” according to US Treasury Secretary Janet Yellen.

“Since 1789, the United States has paid all of our bills on time, and it should stay that way,” Yellen said at a Washington conference on Tuesday, warning of an economic disaster if the US failed to meet its debt obligations.

A debt default will likely result in the government failing to make key military and social security payments, she speculated, and would cause mass layoffs of government officials. Households would also likely fail to make payments on mortgages, cars, and credit cards, causing a collapse in US credit markets.

Interest rates could also rise “into perpetuity,” Yellen added, which would also spell trouble for stocks. High rates have also already weighed heavily on stocks over the past year, with the S&P 500 sliding 20% in 2022 as central bankers hiked interest rates aggressively to combat inflation.

“Default on our debt would produce an economic and financial catastrophe,” Yellen said. “This economic catastrophe is preventable and the solution is simple. Congress must vote to raise or suspend the debt limit and it should do so without conditions, and it should not wait until the last minute.”

But lawmakers are still sparring on a deal to raise the US’s borrowing limit, with House Speaker Kevin McCarthy proposing a bill last week that includes a $4.5 trillion cut to government spending to raise the debt limit by $1.5 trillion.

In the meantime, the US Treasury has implemented “extraordinary” measures to sidestep an immediate fiscal crisis. Those measures will likely only last for a few more months, the Congressional Budget Office previously projected, and the US could default as soon as this summer if policymakers don’t take action.

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