July 13, 2011
AS WITH LETTING LEHMAN FAIL...::
The U.S. Treasury will not default (Kurt Brouwer, 7/12/11, Fundmastery Blog)
I believe a debt ceiling limit extension will be enacted. However, let’s consider what might happen if the debt ceiling limit is not raised. Here in a Q&A format is what I believe you need to know at a basic level.Q: What is a default?
A: In this case, a default would be the failure by the U.S. Treasury to make payments of principal or interest on its debt in a timely manner.
Q: In a given month how much does the Treasury owe as interest on its debt?
A: Roughly about $15–20 billion (more on this in a moment).
Q: How much revenue does the Treasury take in on average in a month?
A: Roughly about $200 billion.
Q: Are you saying the Treasury could pay interest on its debt 10 times over (or more) from monthly income?
A: Yes. Therefore the likelihood of not paying interest on its debt is zero.
Q: But, what about redeeming bonds that come due?
A: As bonds come due, the Treasury would again use monthly income to pay them off. This would lower the debt owed beneath the so-called debt ceiling. Then, the Treasury could turn around and issue debt in that amount up to the debt ceiling.
...ignoring the psychological effects would be a mistake.
Posted by oj at July 13, 2011 6:15 AM
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