The Cost of Default

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Here’s an interesting factlet from Bruce Bartlett. He’s addressing the question of whether a “technical” default — i.e., one in which the Treasury Department misses payments to bondholders for just a few days — would affect interest rates. It turns out that we actually have a case study on just this question:

Some may think that a rise in rates would be temporary. But there was a case back in 1979 when a combination of a failure to increase the debt limit in time and a breakdown of Treasury’s machines for printing checks caused a two-week default. A 1989 academic study found that it raised interest rates by six-tenths of a percentage point for years afterward.

Yikes! Six-tenths of a percentage point is a lot of money. My back-of-the-envelope chicken scratching suggests that if this happens again it would cost the government something like $50-100 billion per year. In other words, no matter what debt ceiling deal we reach, upwards of half of it could be wiped out by higher interest costs if it comes too late to prevent default on the debt.

That probably won’t happen, since even in the worst case I assume that Treasury will prioritize debt payments ahead of everything else (and Treasury’s check printers will continue to function). But that’s still a mighty big chunk of money to be gambling with.

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without free and fair elections, a vigorous free press, and engaged citizens to reclaim power from those who abuse it.

In this election year unlike any other—against a backdrop of a pandemic, an economic crisis, racial reckoning, and so much daily crazy—Mother Jones' journalism is driven by one simple question: Will America will move closer to, or further from, justice and equity in the years to come?

If you're able to, please join us in this mission with a donation today. Our reporting right now is focused on voting rights and election security, corruption, disinformation, racial and gender equity, and the climate crisis. We can’t do it without the support of readers like you, and we need to give it everything we've got between now and November. Thank you.

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