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 at July 13, 2011 6:15 AM
  

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