On the Debt

A lot has been made recently, and for good reason, on the current fight in Congress regarding the debt.  On August 2nd (my birthday), if an agreement cannot be made to rise the debt limit, then the United States will default on our obligations.  Both sides claim that, if this were to happen, it would be the first default in American History.

Well, that is hardly true.  The United States has defaulted on our debt several times, most recently in 1979.  The situation was similar to currently.  Congress was arguing over raising the debt ceiling (which was $829 million).  A deal was reached at the very last minute.  However, a series of “word processor issues” caused the Treasury to not send about $120 million in checks to creditors.  Thus, the US defaulted.  And the markets reacted.  According to a paper written by Terry Zinvey (Ball State University) and Dick Marcus (also of Ball State), the “series of defaults resulted in a permanent increase in interest rates.”  In fact, they estimate interest rates increased by 0.5%, which translated into billions of dollars in extra interest payments.

Of course, if the US reaches the Aug 2nd deadline and defaults, it will be an entirely manufactured crisis.  Even without raising the limit, the US has trillions in assets (such as oil, land, etc) it can sell to pay our bills years into the future.

Just a thought

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