Previous U.S. Treasury Default

[King of the Americas]

Yep, that's right, the U.S. Treasury defaulting on payments to its bondholders is NOT a new or unheard of thing.

This was the subject of my blog this week:
http://betterliberalarguments.blogspot.com/2011/07/real-default-consequences.html

Here's a snip-it:

"...The previous U.S. Treasury default was over a mere $120 million dollars, and occurred in the middle of a debt ceiling debate, similar to the one occurring now. Even though the Treasury had some $800 billion outstanding at the time, the amount actually defaulted on was a very small proportion of the debt. At issue was the fact, that a few checks just didn't get written and sent out, due to bookkeeping and or computer problems, and this caused the federal interest rate to rise by .6%. This raised interest rate was not applied only to the $120 million that was defaulted on, but rather to the entire debt at the time, which was close to a trillion dollars. So, missing the $120 million in payments to bond holders cost the Treasury alone about $6 billion in increased interest...."

---

I just found the whole "no one knows what will happen if we default" argument, wholly WRONG. It is KNOWN as to what will happen if we default to bondholders... It is just that Tea Party folk don't read modern history.

[Bri]

I think the Tea Party argument is that we have enough money to pay bondholders. The question is what happens if we default on other obligations which, to my knowledge, has never been tested.

-Bri

[Emperor_Gestahl]

Well we defaulted on precious metal obligations several times.

[mhaze]

I think it's perfectly fine if interest rates rise. People with savings would make more money, which they should have been doing for some time now. It'd be bad for the US Government yes, but that's them paying for the errors of their ways.

Ideally, interest should pace inflation by a percent or two. Since the lowest paid rate has been T bills, we'll likely see something else be the "good bonds". T bill rates could be higher than those. Big deal, so what.

Look at the problem pension funds are having right now. They are insolvent, because the continued forced low interest by the FED has caused them to be unable to earn the return on their portfolios to be liquid....on the average, they need to earn 8%.

So moving back to higher interest rates would fix some of the definite imbalances in the economy. The US Gov. certainly doesn't want the rates to rise, but they never really controlled the economy anyway. Probably just made it worse. If you can consider the Government to have a "selfish motive", a motive for it's own good, and not that of the citizens of the country, then this is a good example of that. Keep interest rates ridiculously low, inflation higher, that's just a form of stealing from the people.

[eeyore1954]

Yep, that's right, the U.S. Treasury defaulting on payments to its bondholders is NOT a new or unheard of thing.

This was the subject of my blog this week:
http://betterliberalarguments.blogspot.com/2011/07/real-default-consequences.html

Here's a snip-it:

"...The previous U.S. Treasury default was over a mere $120 million dollars, and occurred in the middle of a debt ceiling debate, similar to the one occurring now. Even though the Treasury had some $800 billion outstanding at the time, the amount actually defaulted on was a very small proportion of the debt. At issue was the fact, that a few checks just didn't get written and sent out, due to bookkeeping and or computer problems, and this caused the federal interest rate to rise by .6%. This raised interest rate was not applied only to the $120 million that was defaulted on, but rather to the entire debt at the time, which was close to a trillion dollars. So, missing the $120 million in payments to bond holders cost the Treasury alone about $6 billion in increased interest...."

---

I just found the whole "no one knows what will happen if we default" argument, wholly WRONG. It is KNOWN as to what will happen if we default to bondholders... It is just that Tea Party folk don't read modern history.

How was it determined that the clerical error caused treasury interest rates to rise .6%. This was in the spring of 1979. from 1978 to 1980 interest rates were raising at a fast rate without any clerical errors. The prime rate rose from around 8% to 16% between the beginning of 1978 and 1980.

[Bri]

I think it's perfectly fine if interest rates rise. People with savings would make more money, which they should have been doing for some time now. It'd be bad for the US Government yes, but that's them paying for the errors of their ways.

The government has to borrow money for some time even under the Ryan plan (which doesn't balance the budget until some 30 years from now). So higher interest rates would increase the debt and the time it will take to balance the budget (assuming we don't raise more revenue to offset the difference, which I think we can safely assume you're against). So your argument is that we have to balance the budget, but you want to do so by taking more money away from the government in the form of higher interest rates. Have you really thought this through?

Or maybe you have. According to your theory, allowing the government to default on its obligations might be a great way for the rich to get even richer at the expense of everyone else. I tend to disagree. I don't think anyone -- including the rich -- will benefit from government default.

-Bri

[King of the Americas]

I think the Tea Party argument is that we have enough money to pay bondholders. The question is what happens if we default on other obligations which, to my knowledge, has never been tested.

-Bri

My point was that the previous default to bondholders was 'an accident', and not intentional at all...

That Tea Partiers are hellbent on stopping ANY debt level increase is a real sign that they just don't get the consequences of such an action. They want to 'save' money, but default will cost billions, for everyone.

[Nosi]

My point was that the previous default to bondholders was 'an accident', and not intentional at all...

That Tea Partiers are hellbent on stopping ANY debt level increase is a real sign that they just don't get the consequences of such an action. They want to 'save' money, but default will cost billions, for everyone.

What scares me is maybe they do understand the consequences of such an action and that is their motivation, or the motivation of some of them.

[King of the Americas]

I think it's perfectly fine if interest rates rise. People with savings would make more money, which they should have been doing for some time now. It'd be bad for the US Government yes, but that's them paying for the errors of their ways.

...

... Keep interest rates ridiculously low, inflation higher, that's just a form of stealing from the people.

I find it funny that you think of the federal government as a "them"...

Where do you think 'they' get their money to operate?

That said, I think you make an interesting point about those with savings finally getting paid, as their interest rates have been kept artificially low. However, maybe you could do a little math and tell us all whether the U.S. would see a net gain or loss, from an interest rate increase? Do all of the private holdings exceed the national debt of 14.5 trillion?

[MG1962]

And the Dow heads south :(

[King of the Americas]

How was it determined that the clerical error caused treasury interest rates to rise .6%. This was in the spring of 1979. from 1978 to 1980 interest rates were raising at a fast rate without any clerical errors. The prime rate rose from around 8% to 16% between the beginning of 1978 and 1980.

Maybe they were 'going up', on the heels of the debt ceiling debate occurring at the time?

What 'exactly' caused the default on the $120 million isn't 'known'.

Here's one of my sources for my blog: http://www.npr.org/2011/07/11/137773341/looking-at-when-the-u-s-last-defaulted-on-treasury-bonds

[Bri]

My point was that the previous default to bondholders was 'an accident', and not intentional at all...

That Tea Partiers are hellbent on stopping ANY debt level increase is a real sign that they just don't get the consequences of such an action. They want to 'save' money, but default will cost billions, for everyone.

Sure, but their argument is that as long as we pay bondholders it's not really default and won't have the negative consequences associated with default to bondholders. So the fact that we've defaulted by failing to pay bondholders before wouldn't really be evidence against the argument the Tea Party is making.

There is plenty of other evidence that the Tea Party is wrong, but I'm not sure the event you're referring to applies.

-Bri

[King of the Americas]

What scares me is maybe they do understand the consequences of such an action and that is their motivation, or the motivation of some of them.

It is difficult for me to believe that there ISN'T a concerted effort to damage the economy in a devastating manner, so that it can be laid at President Obama's feet- "This happened under YOUR watch!"

If I were the President, I'd invoke the 14th amendment, and then force the courts to stop me. All of the legal experts I've asked about it, say that only "law makers"/Congress could do it, but in order to save the country, I'd do it anyway...

[King of the Americas]

Sure, but their argument is that as long as we pay bondholders it's not really default and won't have the negative consequences associated with default to bondholders. So the fact that we've defaulted by failing to pay bondholders before wouldn't really be evidence against the argument the Tea Party is making.

There is plenty of other evidence that the Tea Party is wrong, but I'm not sure the event you're referring to applies.

-Bri

We HAD money on hand to pay the previous default...the payments didn't get made 'by accident'.

There's a bill being considered right now, that would instruct which bills get paid, and which ones won't. Do you think the creditors we DON'T pay will have 'zero' effect on our credit rating?

[Bri]

If I were the President, I'd invoke the 14th amendment, and then force the courts to stop me. All of the legal experts I've asked about it, say that only "law makers"/Congress could do it, but in order to save the country, I'd do it anyway...

Although he can't say it, I'm fairly certain that if the debt ceiling isn't raise, the president would have to attempt this rather than default.

-Bri

[Bri]

We HAD money on hand to pay the previous default...the payments didn't get made 'by accident'.

There's a bill being considered right now, that would instruct which bills get paid, and which ones won't. Do you think the creditors we DON'T pay will have 'zero' effect on our credit rating?

No, I definitely agree that defaulting on any obligation (including obligations to non-bondholders) would have a negative effect on our credit rating.

But your example doesn't provide any evidence of this one way or the other, given that in that instance bondholders weren't paid.

-Bri

[Unabogie]

Talk to me like I'm stupid, but if interest rates go up because the US is downgraded, then wouldn't this absolutely slow the economy? Isn't raising interest rates exactly what the fed does when it wants to "cool down" a heated economy that they think is causing inflation? Ok, so my savings account will have a higher interest rate. But it'll be harder to buy a car. Or sell my house. Or borrow money for my business. We have a recovery that's heading back towards recession after a slow, but steady improvement (now that the stimulus money has dried up, funny how it "failed" but now you see the results without it). It seems to me that hiking interest rates right now would be disastrous. Just devastating. I don't think Teabaggers have thought this through at all, and since they seem to be driving the show right now, that should scare the crap out of everyone.

[King of the Americas]

Although he can't say it, I'm fairly certain that if the debt ceiling isn't raise, the president would have to attempt this rather than default.

-Bri

Agreed.

[King of the Americas]

No, I definitely agree that defaulting on any obligation (including obligations to non-bondholders) would have a negative effect on our credit rating.

But your example doesn't provide any evidence of this one way or the other, given that in that instance bondholders weren't paid.

-Bri

My example is evidence of defaulting on bondholders = increased interest rates, that cost billions, even though the amount defaulted upon was very small.

The point being, that even a small payment missed will mean a MUCH larger debt to be paid.

Moreover, that the previous default wasn't purposeful... We COULD have paid those bills, but the checks just didn't get signed & mailed. The creditors simply don't care why they didn't get paid. It is a pay us or you are screwed, deal.

If we don't pay ALL of our bondholders, the rates will go up. This is historical fact, not speculation.

[Bri]

Talk to me like I'm stupid, but if interest rates go up because the US is downgraded, then wouldn't this absolutely slow the economy?

Yes, it would be a bad thing. Yes, people who have significant money in savings accounts and the like might benefit somewhat from higher overall interest rates, but yes it would be bad for the economy overall.

The Tea Partiers deny that our credit rating would be downgraded as long as we pay bondholders first. They ignore very strong evidence that we would be downgraded if we default on any obligation. Some of them deny that we would default on any obligation.

-Bri

[King of the Americas]

Talk to me like I'm stupid, but if interest rates go up because the US is downgraded, then wouldn't this absolutely slow the economy? Isn't raising interest rates exactly what the fed does when it wants to "cool down" a heated economy that they think is causing inflation? Ok, so my savings account will have a higher interest rate. But it'll be harder to buy a car. Or sell my house. Or borrow money for my business. We have a recovery that's heading back towards recession after a slow, but steady improvement (now that the stimulus money has dried up, funny how it "failed" but now you see the results without it). It seems to me that hiking interest rates right now would be disastrous. Just devastating. I don't think Teabaggers have thought this through at all, and since they seem to be driving the show right now, that should scare the crap out of everyone.

I don't think anyone needs to speak to you like you are stupid... Clearly you understand how interest rates affect the economy.

Sadly, I think the teabaggers do as well, which is their goal- to wreck the economy.

[Bri]

My example is evidence of defaulting on bondholders = increased interest rates, that cost billions, even though the amount defaulted upon was very small.

As far as I know, no Tea Partiers have disagreed with this. They argue that we won't default on bondholders.

If we don't pay ALL of our bondholders, the rates will go up. This is historical fact, not speculation.

Sure, but there's no question about paying bondholders. If we prioritize payments (as the Tea Partiers suggest) we won't default on a single bondholder. We'll default on other obligations (which, they argue, won't have the same negative consequences).

-Bri

[Unabogie]

Regarding the idea that we won't default on bondholders, but will by necessity cut domestic spending instead, does it occur to them how this will play to the average American?

"Sure, we've stopped paying your SS check, or your Medicare bill, and the TSA shut down so you can't fly, and your mail takes six times as long to deliver, but you see we had to pay the rich bondholders and the Chinese government first."

I question whether many people who voted for Teabaggers really understood what were in for.

[King of the Americas]

...

Sure, but there's no question about paying bondholders. If we prioritize payments (as the Tea Partiers suggest) we won't default on a single bondholder. We'll default on other obligations (which, they argue, won't have the same negative consequences).

-Bri

I understand that, but my point and example is that merely debating & questioning whether or not to raise the debt ceiling- holding up legislation, and NOT properly prioritizing, 'accidently' led to a few bondholders not getting paid. There's a real threat of this happening now.

I don't think there's any evidence for defaults NOT causing negative consequences, regardless of the creditor.

[Bri]

Regarding the idea that we won't default on bondholders, but will by necessity cut domestic spending instead, does it occur to them how this will play to the average American?

From their point of view, this is what the "average American" voted them into office to do.

No, they don't understand that sinking the whole ship isn't really what people had in mind when they were voted in. On the other hand, anyone voting for them should have seen this coming (the adage "be careful what you wish for" comes to mind).

-Bri

[Bri]

I understand that, but my point and example is that merely debating & questioning whether or not to raise the debt ceiling- holding up legislation, and NOT properly prioritizing, 'accidently' led to a few bondholders not getting paid. There's a real threat of this happening now.

I guess I can see the argument you're trying to make, but if that did happen it would probably be perceived as the fault of the Obama administration for not planning properly for the possibility of the debt ceiling not being raised.

Certainly, the Tea Partiers would say that they didn't hide the fact that they weren't voting to raise the debt ceiling, so if the administration failed to properly plan for that possibility in order to pay bondholders first, it would be the administration's fault.

-Bri

[Kestrel]

Talk to me like I'm stupid, but if interest rates go up because the US is downgraded, then wouldn't this absolutely slow the economy? Isn't raising interest rates exactly what the fed does when it wants to "cool down" a heated economy that they think is causing inflation? Ok, so my savings account will have a higher interest rate. But it'll be harder to buy a car. Or sell my house. Or borrow money for my business. We have a recovery that's heading back towards recession after a slow, but steady improvement (now that the stimulus money has dried up, funny how it "failed" but now you see the results without it). It seems to me that hiking interest rates right now would be disastrous. Just devastating. I don't think Teabaggers have thought this through at all, and since they seem to be driving the show right now, that should scare the crap out of everyone.

A hike in interest rates would cause a slowing of economic growth. Just as the cutbacks in stimulus funds and layoffs of public sector workers caused GDP growth to be about 1.5% lower in the first quarter of this year.

The problem is that few in the right wing understand how a national economy works.

[The Central Scrutinizer]

And the Dow heads south :(

Hooray!!!

That means stocks are on sale. :)

[Unabogie]

Hooray!!!

That means stocks are on sale. :)

You speak truth. For people like me still in the accumulation phase, this is good news. But for all the elderly Teabaggers who voted for this, they are in for some bad news when they watch their savings chopped in half (again).

And just as the market was recovering...

[Toontown]

I don't think Teabaggers have thought this through at all, and since they seem to be driving the show right now, that should scare the crap out of everyone.

What about the possibility that the baggers actually have thought this through, and all they could think to do was screw the pooch? Maybe the baggers only regret that they have but one life to give for their country...er, I mean their beloved Michelle, the Antichristess - or whatever you'd call a silly bitch who aspires to be in the White House with PMS and a migraine when The End comes.

[mhaze]

The government has to borrow money for some time even under the Ryan plan (which doesn't balance the budget until some 30 years from now). So higher interest rates would increase the debt and the time it will take to balance the budget (assuming we don't raise more revenue to offset the difference, which I think we can safely assume you're against). So your argument is that we have to balance the budget, but you want to do so by taking more money away from the government in the form of higher interest rates. Have you really thought this through?

Or maybe you have. According to your theory, allowing the government to default on its obligations might be a great way for the rich to get even richer at the expense of everyone else. I tend to disagree. I don't think anyone -- including the rich -- will benefit from government default.

-BriOh, I've certainly thought it through. I am saying, do not take a myopic view, the US Government is only one part of the US economy, and is not by any means in control of it. Then there is the world economy with which we interrelate.

Higher interest rates are definitely good for some people, bad for others. Artificially forcing rates low causes capital flight, mal investment, and stagflation. That's where we are at right now.

Correcting those issues would be nice for us, bad for the US government.

[Unabogie]

Oh, I've certainly thought it through. I am saying, do not take a myopic view, the US Government is only one part of the US economy, and is not by any means in control of it. Then there is the world economy with which we interrelate.

Higher interest rates are definitely good for some people, bad for others. Artificially forcing rates low causes capital flight, mal investment, and stagflation. That's where we are at right now.

Correcting those issues would be nice for us, bad for the US government.

Again, higher interest rates will hurt the housing market, since fewer people will be able to afford loans. It'll hurt the auto industry, since fewer people will be able to afford loans. It'll hurt the small businesses, since fewer businesses will get loans. But you'll get a few extra points on your CDs?

So what, if your stocks are going down? Can you point to a single reputable economist who agrees with you that higher interest rates, right now, would help the average person in any way, shape or form?

[Bri]

Correcting those issues would be nice for us, bad for the US government.

mhaze, you seem to be arguing with yourself. You complain bitterly about the size of the deficit and the debt and the state of the economy, then in the next breath you claim that somehow increasing the deficit and the debt and impeding the recovery would be "nice for us, bad for the US government."

Increasing the deficit and debt even further and impeding the economic recovery which would almost certainly follow a lowering of our credit rating would be bad for everyone, including those who might benefit in the short term from the increased interest rates.

-Bri

[eeyore1954]

Hooray!!!

That means stocks are on sale. :)

That was certainly true after 9/11 and after President Bush's statement. There was a lot of money to be made. But for long term investors and 401k holders it has been a slow climb back.

[eeyore1954]

Maybe they were 'going up', on the heels of the debt ceiling debate occurring at the time?

What 'exactly' caused the default on the $120 million isn't 'known'.

Here's one of my sources for my blog: http://www.npr.org/2011/07/11/137773341/looking-at-when-the-u-s-last-defaulted-on-treasury-bonds

I don't believe that source is correct that an accidental default on $120,000,000 of bonds cost the US government .6% on all bonds.

[BenBurch]

Yes, it does appear that some Teabaggers will dig in their heels and not vote with Boner (sic), and that they intend to bring down the system. The people elected disestablishmentarians, and they got it.

[The Mutha]

In order to curtail my spending and fix my budget, I'm going to decide not to pay on my credit cards so that I have more money to buy new stuff. I don't see that happening without it killing my credit score...

Correct me if I'm wrong, but Congress can just pass a bill raising the debt limit without any other spending cuts, revenue inhancements or anything else, right? Why the hell don't they just do that and then spend the time necessary to really tackle the budgetary issues?

[The Central Scrutinizer]

That was certainly true after 9/11 and after President Bush's statement. There was a lot of money to be made. But for long term investors and 401k holders it has been a slow climb back.

Depends on which shares you own. :)

[ZouPrime]

In order to curtail my spending and fix my budget, I'm going to decide not to pay on my credit cards so that I have more money to buy new stuff. I don't see that happening without it killing my credit score...

Correct me if I'm wrong, but Congress can just pass a bill raising the debt limit without any other spending cuts, revenue inhancements or anything else, right? Why the hell don't they just do that and then spend the time necessary to really tackle the budgetary issues?
'Cause the Tea Party doesn't want to. They decided to link the budget and the credit under a single fight, and now you guys are stuck with this made-up rule.

[johnny karate]

Correct me if I'm wrong, but Congress can just pass a bill raising the debt limit without any other spending cuts, revenue inhancements or anything else, right? Why the hell don't they just do that and then spend the time necessary to really tackle the budgetary issues?

'Cause the Tea Party doesn't want to. They decided to link the budget and the credit under a single fight, and now you guys are stuck with this made-up rule.

Yeah, the Republicans decided upon the political strategy of taking what has always been a formality and turning it into a bargaining chip in order to force their agenda.

[mhaze]

mhaze, you seem to be arguing with yourself. You complain bitterly about the size of the deficit and the debt and the state of the economy, then in the next breath you claim that somehow increasing the deficit and the debt and impeding the recovery would be "nice for us, bad for the US government."

Increasing the deficit and debt even further and impeding the economic recovery which would almost certainly follow a lowering of our credit rating would be bad for everyone, including those who might benefit in the short term from the increased interest rates.

-BriThere was a recovery floating around? Who believed that?

[Unabogie]

There was a recovery floating around? Who believed that?

Only those nutty economists (http://www.usatoday.com/money/economy/2009-11-01-survey-recovery-economy_N.htm). The same goons who don't know that higher interest rates in a recession are "good for us, but bad for the government".

[Minoosh]

Dang, I wish Obama had started his term with a little Republican cover so that stimulus and health care wouldn't have been such partisan issues. It lowered my opinion of him, to see him delegate the legislation to the "winner-takes-all" Democratic Congress. I began to think of him as aloof and arrogant.

I still think he's a really, really smart guy. I hope this mess is not too bad for the USA. The U.S. = us. I can't understand people who don't see that.

The GOP turned up the heat, they got a lot of concessions and could have claimed a significant victory by saying they tied the debt ceiling to the deficit. Why they didn't is beyond me.

[mhaze]

Only those nutty economists (http://www.usatoday.com/money/economy/2009-11-01-survey-recovery-economy_N.htm). The same goons who don't know that higher interest rates in a recession are "good for us, but bad for the government".Oh, those guys? Yes, a lot of them do say what they are paid to say.

Well, shucks. Where'd that recovery go to? Your article is about 18 months old. We could use some recovering.

Then again, maybe the article just flat doesn't say what you think it says:

Many economists attribute the surge to one-time sparks such as the cash-for-clunkers program, which ended in August; low inventories that are forcing businesses to boost production to restock; and an $8,000 tax credit for first-time home buyers that's set to expire Nov. 30.

Without sustained demand, economists surveyed see growth slipping

You don't have a "Recovery" by some short term jab in the arm and injecting the good stuff into an addict's arm, do you?

[King of the Americas]

I don't believe that source is correct that an accidental default on $120,000,000 of bonds cost the US government .6% on all bonds.

Okay...

So, are you going to offer evidence to the contrary, or is this a request for another source to verify the original claim?

[Unabogie]

Oh, those guys? Yes, a lot of them do say what they are paid to say.

Well, shucks. Where'd that recovery go to? Your article is about 18 months old. We could use some recovering.

Then again, maybe the article just flat doesn't say what you think it says:

Many economists attribute the surge to one-time sparks such as the cash-for-clunkers program, which ended in August; low inventories that are forcing businesses to boost production to restock; and an $8,000 tax credit for first-time home buyers that's set to expire Nov. 30.

Without sustained demand, economists surveyed see growth slipping

You don't have a "Recovery" by some short term jab in the arm and injecting the good stuff into an addict's arm, do you?

That was from 2009. Do I really need to dig up every economist who agrees we are in a recovery? When's the last month we had negative GDP?

[BenBurch]

When you are in denial about something, your first clue ought to be when you start thinking that all of the professionals who contradict your belief have no principles or scruples whatsoever, and will sell their good names to the highest bidder.

[eeyore1954]

Okay...

So, are you going to offer evidence to the contrary, or is this a request for another source to verify the original claim?


I wonder how it was arrived at. I looked at treasury rates between march and June 1979 and did not see a spike in rates . Why would this have affected all bonds.

And common sense tells me to be skeptical. T bill rates aren't based upon clerical errors. Interest rates are based upon risk, inflation expectations (at that time at least) and other economic factors.

The original article cannot really be viewed.

[King of the Americas]

I wonder how it was arrived at. I looked at treasury rates between march and June 1979 and did not see a spike in rates . Why would this have affected all bonds.

And common sense tells me to be skeptical. T bill rates aren't based upon clerical errors. Interest rates are based upon risk, inflation expectations (at that time at least) and other economic factors.

The original article cannot really be viewed.

http://www.google.com/search?client=safari&rls=en&q=U.S.+Treasure+Default+1979&ie=UTF-8&oe=UTF-8