The US couldn't really default, surely ? Well, actually ......
ref :- "McConnell says there is "zero chance" Congress will fail to raise debt ceiling" , The Washington Post , Workblog
The great temptation is to believe that for all the brinkmanship that habitually accompanies the regular upward adjustments to the debt ceiling, Congress will inevitably back a measure (though probably at the eleventh hour) that will prevent the most powerful nation on the planet from slipping into technical default -- a status that would most likely be triggered by the non-payment of interest obligations on US Treasury Bills, Notes and Bonds.
Well, given the enormous ramifications of a default you'd certainly think so, wouldn't you ? And besides, we often hear it broadcasted that the US has NEVER defaulted -- as if that's some kind of guarantee that it never will. Actually, that would be a very selective and almost certainly incorrect reading of history in any case. Congress has often flirted with defaults, even as recently as 2011 and 2013. There have been a surprising number of government shutdowns (ranging from 1 day to weeks in length) that saw suspension of salary payments to federal employees (salaries and social security payments always get hit before interest payments). Some might argue that the actions of President Nixon in 1971 when he unilaterally abandoned the gold standard and its effect on bondholders constituted a theoretical default, but you wouldn't find too many people in the States agreeing with that.
But whatever way you look at them, the events of 1979 must qualify as a default. Republicans in Congress had waited until the last minute to approve the raising of the debt ceiling sought by President Jimmy Carter (that brinkmanship again), and in the rush a breakdown of word processing equipment (yes really, it was a printer problem) caused the Treasury to default on a nominal $122 million of T.Bills. Sure, it was accidental rather than the result of a failure by Congress to pass legislation, and demand for short-dated Bills was huge at the time, but it WAS a default. If the amount in question was tiny (and it was), then the resulting costs of the default definitely weren't -- more of which to follow.
Senate Majority Leader Mitch McConnell, sitting alongside Treasury Secretary Steven Mnuchin, announced yesterday that there was "zero chance" that Congress would fail to raise the debt ceiling by late September -- Mr Mnuchin having said that the government will be able to pay its bill up to Sept. 29th . The Federal Government spends more money than it receives in revenue, and obviously issues its Treasury Bills, Notes and Bonds to make up the shortfall. Congress gets to set the upper limit on total Federal borrowings , and inconveniently for the government it is restricted to the figure of just shy of $20 trillion that it reached in March . Since that time, it has whittled down cash reserves from $350 billion to the current $82 billion to pay the bills whilst it buys time to prepare for a difficult vote.
We're delighted that Mr McConnell is so confident, but as somebody once said : "He would say that, wouldn't he?". Don't get us wrong here ....... the odds against a default are long indeed, but judging from the way government figures are running around congressmen it's plainly not correct to call the chances non-existent. It's a worry that against a thoroughly unpredictable political backdrop, the tribulations of this administration only increase the chances of a shock , and the record of this government in getting legislation passed offers no comfort.
Take the repeal of Obamacare for example ..... the Democrats were squarely against repeal of course, but it was the inability of Mr Trump and his team to round up his own Republicans who felt the measure hadn't gone far enough that sank the Bill. In the case of raising the debt ceiling, we don't know what the Democrats will demand for their support, which is of course an issue in itself but we can expect most or all of them to okay an uplift in the debt limit. The worry once again concerns Republicans, particularly those involved with the conservative (House) Freedom Caucus, who inherently disagree with ever-increasing levels of government debt . Is it even possible that enough of them would make a stand to see the adoption of a higher debt ceiling rejected ?
In the crazy world of modern politics, nowhere is crazier than Washington right now. Maybe that's why people are even contemplating the possibility of default. The likely effects of such a development would seem to suggest that defeat for the administration is unthinkable, but since respected judges are discussing it we'll have to assume that it's not impossible.
So what are the likely effects ? You can hear those who don't believe that the US has defaulted in the past saying that it's impossible to tell because there is no precedent. Not quite true, as we know ..... going back to that strange episode in 1979, that default of a miniscule $122 million in T.Bills caused rates to jump 60 basis points. Estimates vary, but even though the effects were short-lived they may have cost the Treasury as much as $12 billion in increased interest payments once that hike had ricocheted along the yield curve and into a wider range of instruments.
It's hard to imagine how many times you'd have to multiply that number should a full-on default occur now. A spike in rates, a huge sell-off in bonds,stocks and the dollar would be accompanied by recession. The US' credit rating would collapse, making future debt much more expensive for government, corporates and individuals.d. The effects would be global, particularly in emerging markets who have feasted on dollar-denominated debt. God knows what the political fall-out would be. Well, you get the picture ....
At least that's one interpretation, and probably a particularly dark one. But we're going to hear a lot about this in the coming weeks, so it's quite important that we know why it's a big deal. Hey ..... it's almost certain that the whole issue is academic, but let's not pretend we won't all be a bit relieved when they've put this one to bed.