China would be among the first payments under the GOP debt containment plan, Treasury Secretary Yellen says

WASHINGTON — Treasury Secretary Janet Yellen said Thursday that China would be among the first to be paid under a Republican proposal to prioritize some U.S. debt obligations over others, calling it a “dangerous idea” that technically leads to it would shackle the US from failing to meet its payment obligations.

House Republicans are holding up a bill to raise the US debt ceiling, which hit its $31.4 trillion borrowing limit in January. They want any deal on the debt limit to be coupled with spending cuts on social programs.

Your recent debt ceiling proposal, the passed 21-17 issued last week by the House Ways and Means Committee, would prioritize which payments the US Treasury makes first if the US hits the ceiling at which it can no longer issue further bonds. The GOP plan prioritizes meeting public debt obligations and social security payments over other types of government obligations.

“The government makes millions of payments a day on average, and our systems are designed to pay all of our bills on time and not choose which bills to pay,” Yellen said during a Senate Finance Committee hearing on the federal budget. “There’s a reason finance ministers from both parties have rejected this incredibly risky and dangerous idea, and it’s never been tried before.”

Democrats have indicated that Republicans’ plan to prioritize payments would benefit Wall Street and China, since they hold the most government bonds. China holds about $1 trillion in US debt, about 3% of all outstanding US debt.

“If the Treasury Department goes along with this Republican plan, and considering China holds about $1 trillion in US debt, who would get paid first?” asked Senator Sherrod Brown, D-Ohio.

“Well, if that was prioritized, China would get paid before them,” Yellen replied, referring to seniors who receive Social Security and veterans who receive VA benefits. She added that prioritizing debt is “standard by a different name.”

Economists have called the proposal to pay off some of the government’s debts to others “grossly misguided”.

“I can give no assurances about the technical feasibility of such a plan,” Yellen told lawmakers. “It would be an extraordinarily risky, unaudited and radical departure from normal payment practices by agencies across the federal government.”

She said lawmakers must recognize that “raising the debt ceiling is their responsibility to protect full confidence and creditworthiness in the United States.”

The Treasury Department has taken temporary measures to avoid a default in recent months, including suspending new investment in certain state pension programs and a health insurance fund. The measures expire in June.

“We have to pay our bills. We all have our bills to pay. This willingness and commitment to responsibly pay past bills underlies America’s strong credit rating,” said Yellen.

“If we failed to pay any of our bills, it would call into question whether or not we deserve our current credit rating. And it’s just a recipe for economic and financial disaster to think we can pay some of our bills and not all of them,” she added.