Recently, US Treasury Secretary Janet Yellen issued an urgent alert to Congress, warning that the US Treasury is expected to hit a new debt ceiling by mid-January 2025. This announcement has rapidly drawn significant attention from global financial markets.

Yellen underscored that the current total federal debt of the United States has skyrocketed to an astonishing $36 trillion, which is approximately 140% of the nation's GDP. This figure is markedly higher than the internationally accepted safety threshold. It's estimated that interest payments on the debt in 2025 will reach around $1.2 trillion, exceeding the defense budget for that year, which is approximately $780 billion. Yellen anticipates that the Treasury will hit this new borrowing limit between January 14 and January 23, 2025.

With a grave expression, Yellen emphasized the critical juncture the government would face when the debt limit is reached, highlighting that the Treasury would be forced to implement a series of 'extraordinary measures' to maintain normal government operations and avert a dreaded debt default. These 'extraordinary measures' are essentially temporary accounting maneuvers, such as halting investments in certain government retirement funds and tapping into special accounts, which can free up some cash reserves temporarily but do not address the root of the growing debt issue. Yellen earnestly warned that if these temporary measures run out and Congress fails to reach an agreement on raising or suspending the debt ceiling, the Treasury would inevitably be unable to honor its debt obligations, plunging the government into a default situation.

The ramifications of a debt default are extremely severe, especially for the United States, with far-reaching and profound impacts. Firstly, a debt default would lead to a substantial downgrade in the US government's credit rating. International rating agencies would reduce their ratings, which would diminish the US government's credibility in global financial markets and significantly increase its future borrowing costs. As borrowing rates climb, the portion of government spending allocated to interest payments would swell, exacerbating the fiscal burden. Secondly, global investor confidence in the US financial market would be profoundly shaken. The US has been the cornerstone of global finance, and a default would instill doubt about the safety and stability of American markets, potentially triggering massive capital outflows. Such outflows would induce considerable volatility in the US stock and bond markets, leading to drastic declines in asset prices, and pose substantial liquidity risks and valuation losses for financial institutions. Furthermore, the government would be unable to meet its payment obligations, including payments to Social Security beneficiaries, veterans, contractors, and creditors. This would thrust countless dependent individuals into financial hardship, stirring social unrest while also hampering suppliers' ability to secure timely payments, disrupting the normal functioning of the supply chain and delivering a severe blow to public services and social stability. More gravely, given that the US dollar is one of the principal reserve currencies globally, a US government default would destabilize the international financial system.

Yellen's warning is not unfounded. Historically, the US government has faced multiple crises regarding the debt ceiling, with events in 2011 and 2013 serving as notable examples. In 2011, the Obama administration engaged in fierce negotiations with a Republican-controlled House of Representatives over the debt ceiling issue. The parties were at an impasse, and although an agreement was ultimately reached to avert a default risk, Standard & Poor's became the first agency to downgrade the US's sovereign credit rating. A similar crisis unfolded in 2013, where, despite reaching a short-term agreement to avoid a shutdown, the government experienced a partial shutdown lasting 16 days. Both crises eroded market confidence, leading to significant stock market fluctuations and investor anxiety. Yellen is acutely aware of the stakes involved and has pointed out that should a debt default occur again, the ramifications for global financial markets would be far more monumental.

Interestingly, just before Yellen issued her warning, an emergency appropriations bill was signed on December 21, 2023. This legislation ensures that the US government can continue operating until March 2024, temporarily alleviating the possibility of a government shutdown due to cash flow issues. However, this measure does not fundamentally resolve the underlying fiscal challenges faced by the US. Yellen has called on Congress to take swift action to prevent a debt default and seek systemic solutions to the nation's fiscal issues.

Looking ahead, Yellen's warning undeniably signals an urgent call to action for both the government and Congress. They need to take decisive steps in the coming months to avert a debt default. Additionally, global financial markets must closely monitor developments related to the US debt ceiling in order to prepare for any burgeoning financial risks.