How Janet Yellen is going to keep the US from defaulting until at least June

The US Treasury Secretary is going to suspend investment in retiree funds for government employees.
Making the numbers work.
Making the numbers work.
Photo: Evelyn Hockstein (Reuters)
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US Treasury Secretary Janet Yellen is taking “extraordinary” measures to keep the US from defaulting on its debts while waiting for Congress to raise the debt ceiling. 

According to a letter sent to new Republican House of Representatives speaker Kevin McCarthy and other congressional leaders on Jan. 13, one of these measures is to suspend new investments in two government retiree funds for pensions and healthcare. The Treasury is also pausing reinvestment in the Government Securities Investment Fund, which is part of a savings plan for public employees.

Suspending investments in funds like these is a common way for the Treasury to ensure the country can pay its bills. How long this will work depends on how much tax revenue the US rakes in, as well as how inflation and the pause on student loan payments affect the government’s budget. Yellen said she believes the US could get to at least early June without default.

What happens when the US defaults?

If the debt ceiling is raised, the government employees’ funds will be made whole again—but if the country defaults, the US will likely enter a severe recession.

According to the Council of Economic Advisors, default would mean that the tens of millions of Americans who rely on government assistance to get by wouldn’t get it. This would include families, retirees, and veterans.

The country also wouldn’t have the funds to deploy military personnel and equipment, which would endanger the security of the US and its allies. The National Weather Service wouldn’t be able to warn Americans of severe weather events and the Federal Communications Commission wouldn’t be able to keep radios working.

Most importantly, a US default would create a global financial crisis. Most of the world relies on US Treasury debt as one of the safest asset classes. During a time when markets globally are bearish, putting US debt in danger would place much of the world’s economic well-being at risk.