Kai Ryssdal: We haven’t done a whole lot of debt ceiling news this week, mostly because there hasn’t been a whole lot of debt ceiling news. But also because we figure there’s only so much of it you can take.
Conventional wisdom has it that the U.S. government has never defaulted on its debt. An academic paper, though, seems to call that claim into question. Researchers were looking into payments on Treasury notes that were indeed missed about 35 years ago, on what’s been called a technicality. But interest rates did spike in the aftermath. So does the episode tell us anything about consequences of the current debt standoff?
Here’s our senior business correspondent Bob Moon.
Bob Moon: It happened not so long ago — in 1979, around a time that Congress had been wrangling over raising the debt ceiling.
Sound familiar? There was a flood of investors redeeming their government securities, and a glitch at the Treasury Department in writing the checks.
At the University of Wisconsin-Milwaukee, professor Richard Marcus recalls the Treasury balked at first, at paying extra interest on its late payments, until Congress made good on the debt.
Richard Marcus: It made not only the Treasury bill holders whole in the sense of getting their money back, but also lost interest during the delay.
Even so, the co-author of the report, Ball State professor Terry Zivney, says nervous investors drove up the cost of government borrowing. And it stayed higher for many months after.
Terry Zivney: Interest rates in the entire economy rose about six-tenths of 1 percent, which is pretty significant in terms of how big the economy is.
Could rates skyrocket even higher should the Treasury default for real? Zivney says perhaps, but he doubts warnings from some administration officials that it could be “calamitous.”
Zivney: Yes, indeed, if the United States government did as many other countries around the world have done time and time again, said “We’re not going to pay you now, but we’re never going to pay you,” that would be calamitous. I don’t see that happening, I don’t hear anybody suggesting that that is going to happen.
Still, at the Petersen Institute for International Economics, Ted Truman says nobody can know for sure.
Ted Truman: Once the United States government defaults on its obligations for an extended period of time, then you leave the doubt in investors’ minds whether it’s going to happen again. And the United States taxpayers will pay a price for that doubt.
Truman worries that “risk premium” on the federal debt could amount to hundreds of billions of dollars over many years.
I’m Bob Moon for Marketplace.
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