What if the United States Defaulted on the National Debt?


Saturday May 23rd, 2015   •   Posted by Craig Eyermann at 3:30pm PST   •  

pf_cover What would happen if the U.S. government defaulted on making payments on any portion of the $18.1 trillion it has borrowed?

That’s a question the Federal Reserve asked not so long ago, and just in case this might someday happen, the Fed created an emergency plan to deal with the situation. Reuters reports:

In a June 2014 letter to Treasury Secretary Jack Lew seen by Reuters on Monday, Republican Representative Jeb Hensarling of Texas said his staff had reviewed the Fed’s unclassified plans for how to handle a default. (bit.ly/1GZDmKo)

The plans included scheduling new payment dates for defaulted securities, Hensarling said in the letter which was also signed by Republican Representative Patrick McHenry of North Carolina.

The New York Fed, which carries out the will of the Fed in financial markets, would also conduct “business as usual” with regard to accepting Treasury securities as collateral, according to the letter....

In an effort to try to maintain calm on Wall Street, the U.S. central bank could lend investors money after taking Treasuries as collateral under so-called repo transactions, Hensarling said. The Fed also proposed “compensatory payments” for investors who were paid late.

In practice, the potential disruption to U.S. and global markets stemming from a hypothetical default by the U.S. government on its national debt would be minimized as the Fed would take over some of the U.S. Treasury Department’s role in ensuring that the full faith and credit of the U.S. government would be maintained by, in effect, insuring it.

But perhaps the most interesting aspect of the Fed’s emergency plans that Representative Hensarling revealed in his letter to the Treasury Secretary is that under the law, the U.S. Treasury may prioritize paying the holders of U.S. government-issued bonds and notes over other kinds of liabilities, such as government-employee health insurance and pensions, which would avoid an actual default on the national debt altogether.

To put that more simply, the only reason that the U.S. Treasury would default on the national debt would be because it chose to put the interests of people like the bureaucrats who work in the federal government ahead of the interests of the people who loaned it the money it needs to sustain the excessive spending managed by the bureaucrats who work in the federal government.

Featured Image:
The Federal Reserve Board



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