What Happened the Last Time the U.S. Defaulted on It’s Debt

….the [U.S.] government will default on its debt — a nightmare event that would gut investor confidence in U.S. bonds, send our borrowing costs soaring,…

Source: CNN Fortune article: April 2011

One of the things on everybody’s (at least every reporter’s) lips or pen is the subject of our national debt. Word on the Hill is that we pretty much have two options: default on huge amounts of national debt (basically not pay back what we owe), or raise our debt ceiling to legally accommodate our growing indebtedness to foreign and other entities.

On one side, it has been argued that raising the debt ceiling is simply piling on debt for our children to pay after us – therefore we should default and let the chips fall where they may.

The other side says that raising the debt ceiling is our only way forwards at this point; it will allow us to implement long term savings/cutback plans and avoid a national embarrassment and higher interest rates while maintaining confidence in American bonds.

Adding to the high levels of alarm are claims that this instance of the US defaulting on bonds is completely (or almost completely) unprecedented and therefore an indication of the extremely dire nature of our national financial situation.

Over the weekend, Austan Goolsbee, the chairman of the president’s Council of Economic Advisers, argued that Congress should raise the debt ceiling. In an interview with ABC’s “This Week,” he said, “If we hit the debt ceiling, that’s essentially defaulting on our obligations, which is totally unprecedented in American history. [Emphasis supplied] The impact on the economy would be catastrophic.”

Source: Fearing (Another) U.S. Debt Default by the NY Times

This claim, that the US defaulting is entirely unprecedented, is incorrect. Apparently it has happened before.

“Terry Zivney and Richard Marcus describe the default in The Financial Review (sorry, I can’t find an ungated version):”

Investors in T-bills maturing April 26, 1979 were told that the U.S. Treasury could not make its payments on maturing securities to individual investors. The Treasury was also late in redeeming T-bills which become due on May 3 and May 10, 1979. The Treasury blamed this delay on an unprecedented volume of participation by small investors, on failure of Congress to act in a timely fashion on the debt ceiling legislation in April, and on an unanticipated failure of word processing equipment used to prepare check schedules.

Source: The Day The United States Defaulted On Treasury Bills: SeekingAlpha.com
When Did The US Last Default on Treasury Bonds? Listen to the story on NPR

“Ok then,” one might say, “it’s not so bad after all. Better default then take on more debt.”
Is it really better?
Lets take a quick look at what happened in this 1979 instance.

The government “forgot” to pay small bonds holders (individuals as opposed to nations etc) a total of about 120 million dollars – by accident. This by no means represented a significant portion of the Treasury’s total debt (which was close to 1 trillion dollars at the time). It did however raise interests rates – but only by 6 tents of a percent.

Not bad shall we say? Not so fast.
In fact, according to Prof. Zivney, this 120 million dollar mistake cost the U.S. about 6 billion dollars in interest. The new, raised interest rates applied to the entire debt that the U. S. owed at the time. In addition, the rates showed no sign of going back down by the end of Prof. Zivney and Marcus’s study.

So, by not raising the debt ceiling and allowing our nation to default, we would be in effect piling our children with exponentially more debt then if we handled this “in house” (and raised the debt ceiling) in addition to a bad reputation in the international financial community (loss of confidence in U.S. bonds, etc).

But think about it, the value of the dollar has gone down, so it follows that numbers representing value and expressed in dollars (such as the debt ceiling) would go up.

No, I am not an economist, I’m just an American who’s thinking about the future.

Speaking of the future – let me share a couple notes regarding the Casey Anthony case and Caylee’s Law:
Why Caylee’s Law is a Bad Idea Source: Huffington Post
Outcry in America as pregnant women who lose babies face murder charges Source: Gaurdian.co.uk (referenced in “Why Caylee’s Law is a Bad Idea”)

“A man [country] is as good as his [her] bond”

Day 13
77 Dayz to go

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