You don't have to be a political junkie to be aware of the clash on Capitol Hill over the federal deficit, national debt and the debt ceiling. Some say doomsday is just around the corner. Others claim it is a political hoax to cow Congress into raising more revenue.
Whether doomsday or hoax, a lot of average Americans are beginning to wonder what exactly would happen come August 2 if U.S. deficit spending exceeds the current debt limit. Opinions run the gamut, but there has been a relatively recent incident that foreshadows what might happen.
The Washington Post recalls a similar game of political chicken occurred in 1979, when the debt limit was raised eventually to $830 billion, a pittance to today's $14.3 trillion debt ceiling.
Congress managed to avert a major disaster by approving a debt ceiling increase at the last minute, but not before "a flood of investor demand" for payments of U.S. Treasury bills, The Post reports. "A series of technical glitches in processing the backlog of paperwork resulted in thousands of late payments to holders of Treasury bills that were maturing."
So, the United States technically has defaulted on its debt. "It might have been small, it might have been inadvertent, but it happened," Terry Zivney, a finance professor at Ball State University, told the Post.
The technical default involved about $120 million in late payments – payments that eventually were paid in full, with interest, but attracted a class action suit in the process.
Few people remember the incident, other than, of course, the investors who held the $120 million in Treasury bills that temporarily were unpaid. There was no lasting damage to the U.S. reputation as a safe, reliable place to invest your money.
While the 1979 incident is a speck in today's rear-view mirror, Zivney warns it still serves as a useful case study for would could happen if a much larger default results August 2, as Treasury Secretary Timothy Geithner has predicted. "It creates doubt and I think that's the real lesson," Zivney says. "The market has a much longer memory than individuals."
Jim Angel, a finance professor at Georgetown University, told the Post: "It's not as if God appeared to Moses on Mount Sinai and said, 'The United States will always be a AAA credit.' Our reputation is something that we have earned." Angel said history is strewn with countries "that once were great and blew it."
"The simple lesson is," Angel says, "you've got to pay your bills on time. If you don't pay your bills on time, bad things happen."