2013 Debt Default Worse than 2011

Nobody wants a repeat of August 2011’s debt ceiling debacle.

It’s to late. The negative economic impact of a threatened debt default is already double what it was in 2011.

Back then a contentious debate over raising the debt ceiling resulted in a credit downgrade of the U.S. federal government.

This time, the damage is already done and still no agreement. 2013 is worse than 2011!!

Debt Ceiling Debate of 2011

Last time, political divisions resulted in a bitter partisan debate over raising the debt ceiling.

It wasn’t resolved until an 11th hour agreement was reach on the very day that Treasury Secretary Tim Geithner said the federal government could default on its debts. That was August 1st, 2011.

The 2013 equivalent of Geithner’s date is tomorrow, October 17th.

A 2011 default was avoided when Congress passed The Budget Control Act quite literally at the last minute.

Three days after the agreement was signed into law the credit rating of the federal government was downgraded for the first time in history.

Standard and Poor’s downgraded the government’s credit rating to “AA+” for two primary reasons:

  1. An inadequate long-term debt solution
  2. “Policymaking uncertainty”

The Budget Control Act promised spending cuts to fix medium and long-term debt. It would be worked out by a special bipartisan “supercommittee“. The supercommittee failed. That triggered a backup plan called “sequestration”. The sequester is automatic, across-the-board spending reductions split evenly between military and non-exempt government programs.

Social Security, Medicare, Medicaid and the Prescription Drug Program are exempt from sequestration cuts. Combined they have well over $120 trillion in unfunded liabilities that are impossible to pay for. They ARE the long-term debt problem!

Entitlements remained untouched in the sequester.
The U.S. still has no long-term debt solution.

In 2013 nobody talks long-term debt, let alone proposing solutions.

Economic Impact of 2011 and 2013 Debt Debates Compared

2011 Economic Impact of Debt Debate on 1-Month Treasury Bonds Yields (Data: U.S. Treasury)

2013 Economic Impact of Debt Debate on 1-Month Treasury Bond Yields

The reason everyone from Warren Buffett to China are up-at-arms about a default on U.S. federal debt is its negative impact on world commerce. It would result in global recession or worse.

That’s because U.S. Treasury bonds back most of the world’s business transactions. Disrupt them and world commerce literally comes to a standstill.

The most immediately visible effect is felt in the $5 trillion per day “repo market”.  That is where short-term Treasury bonds are converted to cash just long enough to conduct all manner of global business transactions. Repo loans are usually for just a single night.

The cost of a repo transaction depends on the yields (interest rates) paid on Treasury bonds. Yields rise and the cost of transactions rise, too. The great fear is that the yields will skyrocket if a default occurs. That would make repo loans prohibitively expensive. In turn, it would bring national and international commerce to a screeching halt.

The scary part… yields have already jumped up dramatically!!

If all $5 trillion worth of  repo loan transactions in the last 24 hours were backed by 1-month Treasury bonds then they were 11 times more expensive than just 16 days ago! 1-Month yields are already up to 0.32% from a normal below 0.05%. That is a huge jump and its rising fast.

In 2011, 1-month yields rose to 0.16% before an agreement was finally reached. In 2013, yields are already twice that high and there still isn’t an agreement yet!


The two bar graphs above clearly show that the real economic impact of the debt ceiling impasse is already twice as great now as in 2011.

2013 makes 2011 look like a cake walk:
US rating put on negative watch on default fears” – Financial Times, 10/16/2013
Uneasy Investors Sell Billions in Treasuries” – Wall Street Journal, 10/14/2013
Big banks make contingency plans for US default” –  Financial Times, 10/10/2013
Debt Limit Fights Are All The Same– Except This one“” – Forbes, 10/16/2013

The real economic impact right now this minute is as if the U.S. federal government had already defaulted!!

Investor confidence was shaken in 2011. Investor confidence is shattered in 2013.

Since the partial government shutdown began and political bickering ramped up into high gear, global money managers have been urging bond holders to protect themselves against a catastrophe in the U.S. bond markets. That catastrophe is already underway as witnesses in 1-month Treasury yields.

The two main reasons that Standard and Poor’s downgraded the federal government’s credit rating are more true today than in 2011. Fitch just put the U.S. government under a “negative watch”. That means another credit downgrade is imminent.

This time, no matter how it turns out, the economic repercussions of ideological bickering between Democrats and Republicans will have lasting effects long after a deal is finally reached.

There Will Be Blood


About azleader

Learning to see life more clearly... one image at a time!

Posted on Oct 16, 2013, in Budget, Business, Debt, Debt crisis, economics, Economy, Government, news, Politics, Shutdown. Bookmark the permalink. 1 Comment.

  1. No question that I month yueilds are rising but they have been extremely low, ZIRP. For most of 2007, I month yeilds were between 4% and 5% and only started falling in October. Or am I reading this chart wrong?


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