Janet Yellen: Fully Expect Recession If Debt Limit Not Lifted

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Janet Yellen: Fully Expect Recession If Debt Limit Not Lifted
Image source: CNBC Video Screenshot

Following is the unofficial transcript of a CNBC exclusive interview with United States Treasury Secretary Janet Yellen on CNBC’s “Squawk Box” (M-F, 6AM-9AM ET) today, Tuesday, October 5th. Following are links to video on CNBC.com:

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Fully Expect Recession If Debt Limit Not Lifted: Janet Yellen

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ANDREW ROSS SORKIN: This morning President Biden coming out swinging against Republicans saying there is no guarantee that the debt ceiling will be raised as they continue to oppose Democrats’ efforts. Janet Yellen, of course, has been sounding the alarm on the debt ceiling saying that she supports efforts to remove the debt limit altogether. Joining us right now in an exclusive interview is Secretary Janet Yellen. Ms. Secretary, thank you for joining us.

SEC. JANET YELLEN: Thank you for having me.

SORKIN: It's great to see you. Help us understand the state of play as you see it. You have warned Congress that they have until October 18th to raise or suspend the debt limit to avoid what would be the first US ever to fault. Of course, the US now has about $28.4 trillion in debt. The votes don't appear to be there, how do you see it?

YELLEN: Well, you know, it's really up to Speaker Pelosi and Leader Schumer to figure out how to get this done in Congress. What I can tell you is that it's utterly essential that this be done. I've said that by the 18th of October, we will be out of extraordinary measures, have limited cash and likely to exhaust it very quickly. And so, I do regard October 18th as a deadline. It would be catastrophic to not pay the government's bills, for us to be in a position where we lack the resources to pay the government's bills. It really undermines confidence in the full faith and credit of the United States, our willingness to stand behind our debts and make sure that we pay them. And when you think about the impact it could have on 50 million seniors that are expecting Social Security checks, on our troops, on 30 million households waiting to receive their child tax credit payments, and these would be delayed and the delays would grow longer and of course our debt itself. US Treasury securities have long been viewed as the safest asset on the planet that that partly accounts for the reserve status of the dollar and placing that in question by failing to pay any of our bills that come due, we'd really be a catastrophic outcome.

SORKIN: I recognize—

YELLEN: I fully expect it would cause a recession as well.

SORKIN: I recognize that this is ultimately gonna be the responsibility of the Senate and the House but let me ask you this. Senator McConnell did put it on there, put, put the responsibility on the Speaker of the House and the Senate Democratic leader, yesterday, and then Senator Manchin yesterday said, maybe the, the approach in terms of the tools that are available should be reconciliation, that Democrats should do it in reconciliation. Would you support that?

YELLEN: Well, Andrew I support getting it done. This is long been done on a bipartisan basis. The debt ceiling has been raised almost 80 times since 1960 and almost always on a bipartisan basis. This shouldn't be the responsibility of one party or the other. We have to raise the debt ceiling as a routine matter whenever the country runs budget deficits and with the exception of a few years in the late 1990s, this has happened during most of the post war period and it should be routine to raise it. When bills are passed and tax policy is put in place, that's the right time to debate with the fiscal policy of this country should be and we have those debates, but once decisions are made, we have to pay the bills that come from those decisions. And so, to place an arbitrary ceiling on our debt and to create periodic crises, manufactured crises that really place our economy and our financial system at risk especially now that we're recovering from the pandemic in a fragile way, I consider this you're responsible I believe that both parties have a responsibility to get this done and it's really up to the Congress to decide how to manage it, but I believe, it must be done.

SORKIN: One of the reasons that debate is taking place is in part because the Democrats have now linked these two other spending packages together that are quite remarkable in size. And I'm curious if you could take us inside those conversations and whether you support linking those, those two packages together.

YELLEN: Well I support both packages. I think the infrastructure bill that’s, was crafted on a bipartisan basis certainly has the support of the White House. I am supportive of it. Without doubt, we need to modernize our infrastructure. Our roads and bridges in many cases are crumbling. We need to upgrade our ports, our airports to modernize our grid, to build electric power charging stations across the country, to promote the use of electric cars to address climate change. This is really important, but what's in the other package, the reconciliation package, is also tremendously important. It involves childcare, paid leave, child tax credit, investments in education, in early childhood education and very important climate change initiatives, and all of these initiatives are important for our economy to be able to grow. The, some of the supports for children and families will raise a labor force participation, make it easier for women to work in the labor force, make us closer to most other advanced countries. Labor force participation for women now lags behind climate change, it's essential to deal with that. And look, this is a package that’s paid for. We've proposed tax increases and improvements in enforcement that would serve to close what's estimated to be a $7 trillion tax gap over the next 10 years. So, this is a fiscally responsible package and the total spending is less than 1%, It's over 10 years and it's less than 1% of GDP over those 10 years. In that sense, it’s not very large.

SORKIN: Madam Secretary, obviously there are debates about whether, whether it will pay for itself and what the costs will ultimately be. Given the debt that we have generated over, well now a very long time, frankly, on a bipartisan basis I wanted to ask you about a proposal that Paul Krugman has gotten behind recently and that is what's called the trillion-dollar coin as a, as a possible fix or tool in your toolbox to solve this. Effectively minting a coin that could pay off some of our debt. What do you think of that?

YELLEN: I'm opposed to it and I don't believe that we should consider it seriously. It's really a gimmick and what's necessary is for Congress to show that the world can count on America paying its debts. This is equivalent, the platinum coin is equivalent to asking the Federal Reserve to print money to cover deficits that Congress is unwilling to cover by issuing debt, it compromises the independence of the Fed conflating monetary and fiscal policy, and instead of showing that Congress and the administration can be trusted to pay, to pay the country's bills, it really does the opposite.

JOE KERNEN: Madam Secretary, it's great to have you especially since we can at least ask you about your former, your former role and I want to ask you about money supply. Someone pointed out to me that prior to the pandemic, M2 is growing at about 7% in that March and it subsequently went to 20% and grew there through the pandemic, M2. It has now come down to, to a lower level but still double where it was. It’s at 13% and this individual pointed out to me that's way too many dollars and it's responsible for some of the inflation and the inflationary expectations that we have. Are you paying attention at this point still to money supply growth and do you think that this could, that could come back to haunt us to some extent all these dollars?

YELLEN: Well, I still try to pay attention to what's happening in the economy. I trust the Fed to make the right decisions. You know, we have been hit by an incredibly unusual shock and in the one hand, we're almost 6 million jobs short of where we were before the pandemic which means a lot of people who still need jobs. On the other hand, many firms are finding it difficult to hire. We've had extraordinary shifts in the pattern of demand, away from services and toward goods, and I know the Fed is trying to sort through the implications of that supply. Bottlenecks have developed that have caused inflation. I believe that they're transitory, but that doesn't mean they'll go away over the next several months.

KERNEN: Madam Secretary, as you take the lead on a lot of things, economy related, I don't know how much you get into the weeds on appointment, but the comptroller of the currency and the nominee is somewhat controversial because of some of her past comments about the US banking system, talking about Saule Omarova, and some people have said that it indicates that the Biden administration is much more sort of out there on terms of the, of the left side of things, financially, and financial matters than we were led to believe. Did you support that nomination, did you have anything to do with, with vetting Ms. Omarova, Professor Omarova?

YELLEN: Well, Professor Omarova is the President's nominee and I'm aware that she's an expert in Fintech, Fintech and banking regulation, and I think she deserves a fair hearing by the Senate. I hope she will get that.

BECKY QUICK: Madam Secretary, Senator Warren came out pretty strongly against Jay Powell being re-nominated. She said she won’t support, there are now questions being asked about whether the administration will go ahead and re-nominate Jay Powell. What's your opinion, should he get a second term?

YELLEN: Well, it's up to the President to make the nomination, and the President hasn't yet made that decision. I know he will talk to many people and consider a wide range of evidence and opinions and make the very careful decision.

SORKIN: Madam Secretary, before we let you go, I wanted to talk to you a little bit for a moment just about taxes because to pay for all the things that the administration is seeking, there is a big tax raise on the, on the, on the docket but also an effort that I know you're a proponent of for the IRS to collect more information and more tax dollars but more information about taxpayers’ bank accounts including annual cash flows and I was curious whether you think the IRS has the, the wherewithal to actually do that?

YELLEN: Well, of course they do. Right now, on every bank account that earns more than $10 a year in interest, the banks report the interest or into the IRS, that's part of the information base that includes W2s and reports on dividends and other income that taxpayers have earned so collection of information is routine. But there's an enormous tax gap in the United States, estimated at $7 trillion over the next 10 years in terms of the shortfall of tax collections to what we believe are owed, and that, that's not coming from people failing to report wage income or dividend income where there's good information. It comes from places where the information on income is opaque and can be hidden. And a simple way for the IRS to get a sense of where that might be is just a few pieces of information about individuals’ bank accounts, nothing at the transaction level that would violate privacy, simply aggregate inflows into the account over the year and aggregate outflows and that would really help the IRS target their auditing resources which we've proposed to greatly expand to do their audits on those usually high-income wealthy individuals that may be concealing their, their transactions and their income and these would be helpful indicators of where it would make sense for auditing to occur. So, it is not reporting of individual transactions or anything of the like, and it would be a simple thing for banks and other payment providers to provide along with the other information they're already providing.

SORKIN: Madam Secretary, I want to thank you for joining us this morning right here on “Squawk Box.” I hope we can do it again soon to continue this conversation.

YELLEN: My pleasure, thank you for having me.

SORKIN: Thank you.

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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver
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