Obama-Era Debt Showdown? Janet Yellen Warns Kevin McCarthy About Budget Ceiling

U.S. Secretary of the Treasury Janet Yellen sounded the alarm Friday, setting aside the long-running bipartisan debate about national debt limit after Republicans took control of the House of Representatives.

What Happened: In a letter penned Friday to newly appointed House Speaker Kevin McCarthy, Yellen said the U.S. national debt ceiling is projected to reach its statutory limit as early as Jan. 19, months ahead of economist estimates.

“Once the limit is reached, Treasury will need to start taking certain extraordinary measures to prevent the [U.S.] from defaulting on its obligations,” Yellen said in the letter.

McCarthy hinted earlier this week that he and other Republicans would try to use the national debt ceiling showdown to force budget cuts.

“One of the greatest threats we have to this nation is our debt,” McCarthy said on Fox News Tuesday, adding, “We don’t want to just have this runaway spending.”

McCarthy argued Congress had until this summer to come up with a plan before the U.S. hits its debt ceiling; Yellen disagrees.

President Joe Biden, according to the New York Times, said he will not engage in debt limit negotiations and that Congress must vote to raise it unconditionally.

For the uninitiated, the debt limit is the total sum of money that the U.S. government is permitted to borrow in order to pay its current debts, which include Social Security and Medicare payouts.

New spending commitments are not permitted by the debt ceiling. It only enables the financing of pre-existing legal commitments made in the past by Congresses and presidents of both parties.

Why It Matters: The economic fallout from not raising the debt ceiling would be disastrous. It would result in the government falling out of compliance with the law, which would be unprecedented in American history.

Biden and Congress might be headed for the riskiest debt-limit discussion since 2011, the Times noted, when former President Barack Obama and a newly elected Republican majority in the House came close to defaulting on the country's debt before striking an 11th-hour settlement.

To avoid such a situation, Goldman Sachs experts predicted Congress would need to raise the debt ceiling sometime around August 2023, but Yellen is pushing for the increase far sooner.

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