Monday, June 27, 2011

Showdown With the Tea Party Terrorists

The Tea Party Terrorists are betting that Obama will blink on substantial spending cuts to defund programs that are both valuable and wildly popular.  They're hoping just the terroristic threat of a default on our soverign debt will be enough to frighten Mr. Obama into doing their bidding.  But they should know, America does not negotiate with terrorists, foreign or domestic.  So what might a default mean?  Well, there is historic president for an American default, believe it or not.  The Economist has the story:
[H]istory 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.

Even if Congress were to tackle turmoil by quickly lifting the debt ceiling, the stain would linger. “In the past our assumption was interest would always be paid on time,” says Steven Hess of Moody’s, a ratings agency which has cautioned that even a brief default would cost America its coveted Aaa status.

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