While I don't believe we'd default, as it would be and act of stupidity and irresponsibility that I believe is even beyond congress. Even if the debt ceiling is hit, we should be able to cover our bonds and pensioners would be the ones who get hit... which would be politically intolerable. If the US government just decided to be ornery and thumb their noses at a bunch of debts which we have the ability to service, here's my take on what would happen.
US bonds are used to store liquid assets by a whole lot of people. They are perfectly liquid and can be changed to dollars at any time, guaranteed. Also, there is a really good expectation about how much they're worth at any given time. The trade in US bonds is somewhere around $180 trillion per year. Since only about $9 trillion of our debt is actually in bonds held by private parties (i.e. not Social Security or something similar), this means that each T-bill use in a transaction every two or three weeks on average for such things as banks using them for collateral on short term loans. Their predictability and liquidity are what provide their use, it's like having a stack of dollars that yield 3% or so.
If we delayed paying, the liquidity of US bonds would be brought into question. We would essentially be saying that we're not going to redeem them because of political whims, which clearly makes them non-liquid. This would affect about $6 billion worth of bonds on Oct 31st, which isn't a big amount globally speaking. It could convince those who are on the lending end of the $180 trillion per year that US bonds are not liquid and therefore not acceptable collateral for short term loans. If this happened, it would cause a cash crunch and therefore a recession.
I've heard different opinions about what would happen to T-bill rates in the future. It would definitely make US bonds less attractive, but in the short term it might make other choices even less attractive, which would actually reduce the US government's borrowing costs at least until things settled down.
no subject
US bonds are used to store liquid assets by a whole lot of people. They are perfectly liquid and can be changed to dollars at any time, guaranteed. Also, there is a really good expectation about how much they're worth at any given time. The trade in US bonds is somewhere around $180 trillion per year. Since only about $9 trillion of our debt is actually in bonds held by private parties (i.e. not Social Security or something similar), this means that each T-bill use in a transaction every two or three weeks on average for such things as banks using them for collateral on short term loans. Their predictability and liquidity are what provide their use, it's like having a stack of dollars that yield 3% or so.
If we delayed paying, the liquidity of US bonds would be brought into question. We would essentially be saying that we're not going to redeem them because of political whims, which clearly makes them non-liquid. This would affect about $6 billion worth of bonds on Oct 31st, which isn't a big amount globally speaking. It could convince those who are on the lending end of the $180 trillion per year that US bonds are not liquid and therefore not acceptable collateral for short term loans. If this happened, it would cause a cash crunch and therefore a recession.
I've heard different opinions about what would happen to T-bill rates in the future. It would definitely make US bonds less attractive, but in the short term it might make other choices even less attractive, which would actually reduce the US government's borrowing costs at least until things settled down.