U.S. Treasury Secretary Janet Yellen has said the department will not be able to satisfy its obligations if the debt ceiling is not raised by June.
In a letter to the House of Representatives on May 22, Janet Yellen warned that it is ‘highly likely’ that the Treasury will not be able to cover government obligations by next month.
The warning comes as the U.S. economy approaches its debt ceiling or debt limit. This is a legislative limit on the national debt the Treasury can incur.
Effectively, it is a limit on how much money the federal government can pay by borrowing more money on the debt it already borrowed.
President Joe Biden and House Speaker Kevin McCarthy ended discussions on May 22 without an agreement on how to raise the debt ceiling. U.S. government debt currently stands at $31.4 trillion, and we are less than two weeks before a potential default.
Gloomy Outlook on Debt Ceiling
Yellen’s outlook was gloomy, asserting that a failure to lift the debt ceiling would be a disaster for the economy.
“With an additional week of information now available, I am writing to note that we estimate that it is highly likely that Treasury will no longer be able to satisfy all of the government’s obligations if Congress has not acted to raise or suspend the debt limit by early June, and potentially as early as June 1.”
She added that waiting until the last minute to suspend or increase the debt limit can have serious consequences. Among them were harm to business and consumer confidence and increases in short-term borrowing costs. There would also be negative impacts on U.S. credit ratings.
Representatives from both sides of the political divide have been drafting ideas to reduce federal spending and drop the deficit.
Joe Biden recently said that he would not back a deal that “protects wealthy tax cheats and crypto traders,” among others.
Impact On Crypto Markets?
Crypto markets and stock markets have been relatively correlated recently. Therefore, the outcome is unlikely to be good.
Wall Street bank strategists are sounding alarm bells over stock market volatility as the deadline approaches. Matthew Miskin, co-chief investment strategist at John Hancock Investment Management, said, “Coming into this week, the market looks more vulnerable to volatility around the debt ceiling,”
On May 23, crypto analyst “Cold Blooded Shiller” highlighted what happened last time the debt limit was reached in 2011.
The debt limit was hit three months prior to an agreement being signed. Additionally, stock markets dumped the week after the agreement.
Crypto markets, which have been trending down and sideways for five weeks. Therefore, they could well follow suit in the short term.
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