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Charles Laffiteau's Bigger Picture

Last update - Friday, July 15, 2011, 22:13 By Charles Laffiteau

The big debate here in the States at the moment concern the raising of the debt ceiling. Many Americans, including some members of Congress, don’t really understand what this means. They’re under the mistaken belief that raising the debt ceiling is like getting an increase of your credit card’s limit.

Since the American federal government is already deeply in debt, they don’t want an increase in the debt ceiling, believing we can hold the line at America’s current $14trn level of debt. These right-wing ‘debtors’ have replaced the ‘birthers’ as the latest wave of conservative demagoguery that has no basis in fact.
What many Americans don’t understand is that the US Treasury sells American bonds worldwide, and that these bonds mature at intervals ranging from one to 20 years. When the bonds do eventually mature, the US government must pay off the bondholders – many of whom are American citizens – and issues new bonds to sell to investors. By refusing to raise the debt ceiling, Congress would in effect tell the US Treasury that it can no longer issue and sell new bonds to pay off those issued 10 years ago when Republicans also controlled the White House. In other words, the Republican Congress would be repudiating the debts it ran up in 2001.
The debtors are also under the mistaken belief that if America doesn’t pay off bondholders when their bonds mature, there won’t be any impact on them or the American economy.
Since America has never defaulted on any of its sovereign debt during its 200-plus years history, the ‘debtors’ say President Obama’s predictions of severe consequences for America’s economic recovery are wrong, even though they can’t find a single economist or business CEO who agrees with them. Just like their birther cousins, the debtors don’t like to be confused with facts.
Indeed, there was an incident back in 1979 that gives us some idea of what will happen if Congress doesn’t raise the debt ceiling and we do default on 2 August.
Back then, America actually went into what was called a ‘technical default’ when the government simply failed to pay off about $120m worth of US Treasury Bonds. This brief ‘technical default’ wasn’t because the debt ceiling needed to be raised or because of disagreements between Republicans and Democrats over the federal budget. It happened because of computer system failures at the US Treasury Department that resulted in thousands of bondholders not receiving their checks until a few days after the computer snafu was discovered.
Yet even though this was only a ‘technical’ due to system failures rather than political discord, America still paid a heavy price. For the next six months, the interest rate America was obligated to pay on new bonds it issued was a full 0.5 per cent higher than on those issued in the six months before the default.
That may seem like a small figure. But when your debt is at $14trn, that works out to about $4bn more per day in interest. In other words, if the debtors get their way, America will only get deeper into debt.

Charles Laffiteau is a US Republican from Dallas, Texas who is pursuing a PhD in International Relations and lectures on Contemporary US Business & Society at DCU

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