U.S. Treasury Secretary Janet Yellen testifies before the Senate Finance Committee on U.S. President Joe Biden’s Fiscal 12 months 2024 application at the U.S. Capitol in Washington, U.S., March 16, 2023.
Mary F. Calvert | Reuters
WASHINGTON — Treasury Secretary Janet Yellen said Thursday that China will be among the first in line to receive payment under a Republican proposal to prioritize some US debt obligations over others, calling it a “dangerous idea” that would technically default US bonds.
Republicans in the House of Representatives are stalling a bill to lift the U.S. debt ceiling, which hit a $31.4 trillion debt ceiling in January. They need the agreement on the debt limit to be accompanied by cuts in spending on social programs.
Their latest debt ceiling proposal, which passed 21-17 of the House Ways and Means Committee last week, will prioritize which U.S. Treasury Department payments will be made first when the U.S. reaches a ceiling where it will probably not issue bonds. The GOP prioritizes government debt obligations and social security payments over other forms of government liabilities.
“The federal government, on average, makes thousands and thousands of payments every day, and our systems are built to pay all our bills on time, not pick and select which bills to pay,” Yellen said during a Senate Finance Committee hearing on the federal budget. “There’s a reason why the Treasury secretaries of each parties rejected this extremely dangerous and dangerous idea and it has never been tried before.”
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Democrats identified that a Republican plan to prioritize payments would profit Wall Street and China as they hold most government bonds. China owes about $1 trillion in US debt, or about 3% of all outstanding US debt.
“If the Treasury goes together with this Republican plan, making an allowance for that China has about $1 trillion in US debt, who will get paid first?” asked Senator Sherrod Brown of D-Ohio.
“Well, if that was a priority, China would get paid before them,” Yellen replied, referring to seniors who collect Social Security and veterans who receive VA advantages. She added that debt prioritization is “by default by a distinct name”.
Economists called the suggestion to repay some debts owed by the government over others “seriously misguided.”
“I cannot give any guarantees as to the technical feasibility of such a plan,” Yellen told MPs. “It would be an especially dangerous, untested and radical departure from normal agency payment practices across the federal government.”
She said lawmakers must recognize that “it’s their duty to lift the debt ceiling to guard the full faith and credit of the United States.”
The Treasury Department has taken interim measures in recent months to avoid insolvency, including suspending recent investments in some federal pension programs and the health advantages fund. The measures are on account of expire in June.
“Now we have to pay our bills. Now we have to pay all our bills. This willingness and commitment to the responsibility of paying the bills which have already been incurred is at the heart of the United States’ strong credit standing,” Yellen said.
“If we had not paid any of our bills, it would have put into query whether we deserved our current credit rating. And considering that we are able to pay a few of our bills and never all of them is solely a recipe for economic and financial ruin. of them,” she added.