Here’s How Many Trillions a Temporary Default Could Cost Taxpayers In Years to Come

Both Republicans and Democrats alike are rushing to meet the Treasury’s August 2 deadline to increase the nation’s debt (NYSE:TBT) ceiling in order to prevent default, and as each day passes with no resolution, each side refusing to make all of the concessions required by the other, it’s looking more and more likely that date will come with no agreement reached. According to Treasury Secretary Tim Geithner, such an eventuality “would be catastrophic for the economy”. In his interview on CBS‘s (NYSE:CBS) “Face of the Nation”, he also said that, “no responsible leader would say the United States of America, for the first time in its history, should not pay its bills, meet its obligations.”

But in fact, August 2, 2011 would not be the first incident in which a debt limit was not increased by the Treasury’s deadline. In 1979, Congress was heatedly debating the budget until the last minute, when Treasury Secretary W. Michael Blumenthal warned that the country was just hours away from its first ever default. A debt ceiling increase to $830 million was approved at the last minute, but with heightened demand for Treasury bills and a series of technical glitches in processing the backlog of paperwork, the Treasury was delayed in making payments to bill holders that were maturing that April and May, which was, in fact, default.

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Of course, the incident was minor, with the Treasury missing payments on only about $120 million worth of bills, which were ultimately paid in full, with back interest, and the whole incident was quickly forgotten. But Terry Zivney, a finance professor at Ball State University, and his partner Dick Marcus, who together authored “The Day the United States Defaulted on Treasury Bills,” (NYSE:TLT) say the default resulted in permanently increased interest rates of more than half a percent, or 50 basis points, which ultimately accounted for increased interest payments on the nation’s debt numbering in the billions of dollars. “The impact is smaller at first because only new debt is affected,” they wrote. “But over time, as the older debt matures and becomes refinanced at higher rates, the entire cost of the default is realized.”

And that happened despite Congress raising the debt ceiling before the deadline. Now, with the Treasury issuing significantly more payments, and larger payments, a temporary default could mean trillions more dollars coming out of taxpayers’ pockets over the next thirty-odd years as the result of uncompromising legislators.