Thursday, July 7, 2011

What Happens if the US Defaults on August 2nd

Here is a bit from an article in the Economist that does a good job of looking at all the issues. This bit is especially relevant:
Yet history suggests that even a technical default can be costly. America’s only known instance of outright default (other than refusing to repay debts in gold in 1933) occurred in 1979 when the Treasury failed to redeem $122m of Treasury bills on time. It blamed unprecedentedly high interest from small investors, a delay in raising the debt ceiling and a word-processing-equipment failure. Although it repaid the money and a penalty to boot, a later study by Terry Zivney, now of Ball State University, and Richard Marcus of the University of Wisconsin-Milwaukee found it caused a 60-basis-point interest-rate premium on some federal debt. Today that would cost $86 billion a year or 0.6% of GDP, a hefty penalty for something so avoidable.
So now you have a lower bound on the very real economic costs of this political game of "chicken" that the Republicans are playing with Obama. $86 billion is $250 for every man woman and child in America. I'm pretty sure that everybody in the bottom 50% of society would really, really like to get $250, so this isn't chickenfeed. But Republicans act like it is. They act like it will be no big deal if they miscalculate and cause this cost (or something much, much worse).

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