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Treasury Secretary Yellen Warns that the US could breach debt ceiling next month

Commentaries & Views

In a letter to House Speaker Kevin McCarthy as well as other bipartisan leaders Treasury Secretary Janet Yellen said that the United States could breach its debt ceiling as soon as June 1. In her letter, she said, "After reviewing recent federal tax receipts, our best estimate is that we will be unable to continue to satisfy all of the government’s obligations by early June, and potentially as early as June 1, if Congress does not raise or suspend the debt limit before that time."

The implications of reaching the X-date (The time when the Treasury will not have enough cash to meet its obligations) before Congress, the Senate, and the administration reach a compromise and pass legislation that will either raise or suspend the debt ceiling are profound. The economic effect of this unprecedented event could most certainly lead the United States into a recession, or much worse.

The United States has always met its obligations which include interest payments to individuals and other nations. The government officially ran out of money on January 19 as the debt ceiling of $31.4 trillion was reached.

In prior instances, a divide between Democrats and Republicans has led to a delay in raising the debt ceiling. However, the divide between parties cannot be resolved without major compromises on both sides. In April House Republicans put forward and passed 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 insists that legislation be passed to raise the debt ceiling without any additional conditions. The president’s response was, "Folks, it’s the same old trickle-down dressed up in MAGA clothing. Only worse…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."

Now that the government has less time than previously believed to raise or suspend the debt limit it increases the probability of an 11th-hour showdown. Historically legislators have played kick the can, but in this instance they are playing chicken.

Gold futures traded to a high today of $2015.40 before retreating as the dollar strengthened resulting from a report that US manufacturing and construction spending improved. As of 5:30 EST the most active June 2023 contract of gold is currently down $7.80 and fixed at $1991.30.

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