Warning of Severe Economic Consequences by U.S. Treasury Secretary Yellen

In a prepared speech to the Sacramento Metropolitan Chamber of Commerce today, U.S. Treasury Secretary Janet Yellen warned of the potential for severe economic consequences if the House does not address and raise the debt ceiling.

“It is unlikely that the federal government would be able to issue payments to millions of Americans, including our military families and seniors who rely on Social Security,”

The debt ceiling is an upper limit set on the amount of money that the government may borrow.

On January 19, 2023, the U.S. government officially hit the debt ceiling of $31.4 trillion. U.S. Treasury Secretary Yellen immediately implemented extraordinary measures to prevent the United States from defaulting such as suspending any new investments of retirement funds from government employees. The debt ceiling has been modified 20 times since 2002.

However, raising the debt limit could be much more difficult than on previous occasions. Republicans are demanding dramatic cuts to future spending in exchange for increasing the debt ceiling. On April 19 House Republicans put forward the “Limit, Save, Grow, Act”, a 320-page bill that would raise the debt limit by $1.5 trillion through the end of March 2024. According to McCarthy the plan includes $4.5 trillion in savings through cutbacks.

President Biden responded to the legislation by saying, “Folks, it’s the same old trickle-down dressed up in MAGA clothing. Only worse.” The president added that the cuts target programs that “millions of working-and middle-class Americans count on” while “separately pushing more tax giveaways” that benefit corporations and the wealthy.

The divide is setting up the potential for an 11th-hour showdown. More alarming is the X-Date could occur sooner than previously anticipated. This is because 2022 tax returns are 29% below the tax revenue of prior year. Analysts believe this date could come in early August or potentially as soon as late July. Research strategist at BofA Global Research expects to hear guidance from Secretary Yellen in the next two weeks about the actual day (X-date) when the government can’t meet its obligations.

The uncertainty of a government default has been highly supportive of gold futures pricing which remains above $2000. As of 5:55 PM EST gold futures basis most active June 2023 contract is up $7.40 or 0.37% and fixed at $2007.20.

Wishing you as always good trading,