The Bigger Picture
Published on July 15th 2011 in Metro Éireann By Charles Laffiteau
The big debate currently underway here in the states is over raising the United States debt ceiling. Unfortunately, many Americans including some members of Congress don’t really understand what raising the debt ceiling is all about. So today I will attempt to explain what it really means and the ramifications for the American and global economy if Congress doesn’t take action to raise it by August 2nd.
Many Tea Party activists and Republican conservatives in Congress are under the mistaken belief that raising the US debt ceiling is like getting an increase of your credit card’s credit limit. Since the American federal government is already deeply in debt, they don’t want an increase in the debt ceiling because they are under the mistaken belief that they can hold the line at America’s current 14 trillion dollar level of debt. But these right wing ‘debtors’ have in fact replaced ‘birthers’ as the latest wave of conservative demagoguery that has no basis in fact.
What many Americans don’t understand is that the US Treasury sells American bonds worldwide and that these bonds mature at intervals ranging from one to twenty years. When the bonds do eventually mature the US government pays off the bondholders, many of whom are American citizens, and issues new bonds to sell to investors. By refusing to raise the debt ceiling Congress would in effect say the US Treasury department can no longer issue and sell new bonds to pay off the bonds issued 10 years ago when Republicans also controlled the White House. In other words the Republican Congress would be repudiating the debts it ran up in 2001
The ‘debtors’ are also under the mistaken belief that if America doesn’t pay off bondholders when their bonds mature that this won’t have any impact on them or the American economy. Since America has never defaulted on any of its sovereign debt during its two hundred plus years history, the ‘debtors’ say President Obama’s predictions of severe consequences for America’s economic recovery are wrong even though they can’t find a single economist or business CEO who agrees with them. In other words, the ‘debtors’ and their supporters in Congress are just like their ‘birther’ cousins in that they don’t like to be confused with facts.
Although the ‘debtors’ and their allies in Congress are correct in their belief that America has never defaulted on its debts, there was an incident back in 1979 that gives us some idea of what will happen if Congress doesn’t raise the debt ceiling and we do default on August 2nd.
Back in 1979 America actually went into what was called a ‘technical default’ when the government simply failed to pay off about 120 million dollars worth of US Treasury Bonds. This brief ‘technical default’ wasn’t because the debt ceiling needed to be raised or because of disagreements between Republicans and Democrats over the federal budget. It happened because of some computer system failures at the US Treasury Department that resulted in thousands of bondholders not receiving their checks until a few days after the computer snafu was discovered.
But even though this was a ‘technical default’ due to computer system failures rather than political discord, America still paid a heavy price for this default. For the next six months following this brief 120 million dollar ‘technical default’, the interest rate America was obligated to pay on new bonds it issued was a full ½ percent higher than the interest rate it paid on bonds issued in the six months before the default.
Now ½ percent additional interest may not seem like a lot, but when your debt is at 14 trillion dollars, that works out to about 4 billion dollars more per day in interest. In other words, if the ‘debtors’ get their way, America will only get deeper into debt.