Debt default collapses credit markets spilling up to financial catastrophe

A government debt default would be catastrophic for the US economy, sparking mass unemployment, payment failures, and interest rates rising "into perpetuity," according to US Treasury Secretary Janet Yellen.

"Since 1789, the United States has paid all of our bills on time, and it should stay that way," Yellen said at a Washington conference on Tuesday, warning of an economic disaster if the US failed to meet its debt obligations.

A debt default will likely result in the government failing to make key military and social security payments, she speculated, and would cause mass layoffs of government officials. Households would also likely fail to make payments on mortgages, cars, and credit cards, causing a collapse in US credit markets.

Interest rates could also rise "into perpetuity," Yellen added, which would also spell trouble for stocks. High rates have also already weighed heavily on stocks over the past year, with the S&P 500 sliding 20% in 2022 as central bankers hiked interest rates aggressively to combat inflation.

"Default on our debt would produce an economic and financial catastrophe," Yellen said. "This economic catastrophe is preventable and the solution is simple. Congress must vote to raise or suspend the debt limit and it should do so without conditions, and it should not wait until the last minute."