Thursday, July 28, 2011

Real Default Consequences

"Don't raise the debt limit, defaulting will teach us a good lesson."

Defaulting on debt is not an unheard of thing for the U.S. Treasury.  In 1979, the U.S. failed to make timely payments to all its bondholders.  The result was not unlike what would happen if any of us failed to make the minimum amount due to any of your credit cards or other debts.  If you miss one payment, the interest rates on all your loans goes up.  This is because interest rates are set by a creditor's perceived ability to repay the debt at hand.  Missing only a single payment is often enough to downgrade a credit score, for a very long time.

The previous U.S. Treasury default was over a mere $120 million dollars, and occurred in the middle of a debt ceiling debate, similar to the one occurring now.  Even though the Treasury had some $800 billion outstanding at the time, the amount actually defaulted on was a very small proportion of the debt.  At issue was the fact, that a few checks just didn't get written and sent out, due to bookkeeping and or computer problems, and this caused the federal interest rate to rise by .6%.  This raised interest rate was not applied only to the $120 million that was defaulted on, but rather to the entire debt at the time, which was close to a trillion dollars.  So, missing the $120 million in payments to bond holders cost the Treasury alone about $6 billion in increased interest.  

The debt limit was eventually increased and the U.S. was then able to meet its following obligations, but even after 6 months of paying our bills in full, the interest rate was not decreased.  

With a current debt of $14.5 trillion, a tiny rate increase of .6% would add an additional $87 billion to the interest we are already paying.  Add to that, that the interest rates of all American debt, both private and public, would go up, further weakening an already unstable market and further tightening the loan industry's purse strings.    

It is 30 years later, and the Congressional Freshmen brought into office by the Tea Party want no part of raising the debt limit.  They are urging their Republican brethren to stand their ground and refuse to raise the debt limit, and demand that we cut spending, while at the same time refuse any notion of increasing taxes.  The consequences of another U.S. default are both real and unrealized by the Tea Party.  

Defaulting on our debt has in the past, and will most certainly in the future, cost Americans greatly.  Sadly the Tea Party's history books, don't include past Treasury defaults and its effect on the debt and its interest rate.


  1. I think your blog is very good! I enjoy your writing, I sat and read several, and actually felt like reading more. You're talented, you should promote your blog on some various writer's sites - just my opinion.

  2. 6 billion is a hell of a lot of interest for missing such a small payment...