Proof that not raising the debt ceiling will be a disaster?

The Washington Post and other publications are all excited that they have found proof that not raising the debt ceiling immediately will be a disaster. There is a big problem though, everyone is assuming that there will be default.

The Sunday airwaves brimmed once again with talk of what would – or would not – happen if lawmakers fail to meet the Aug. 2 deadline to raise the nation’s legal limit on borrowing. Unmentioned by either side was an obscure bit of budgetary history in which the country did default on some of its bills, and wound up paying the consequences.

Treasury Secretary Timothy F. Geithner said on CBS’s “Face the Nation” that inaction “would be catastrophic for the economy” and added 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.” . . .

In fact, there was one short-lived incident in the spring of 1979 that offers a glimpse of some of the problems and costs that might arise if the stalemate on Capitol Hill continues. Then, as now, Congress had been playing a game of chicken with the debt limit, raising it to $830 billion – compared with today’s $14.3 trillion – only after Treasury Secretary W. Michael Blumenthal warned that the country was hours away from the first default in its history. . . .

Zivney said that the 1979 incident, which pales in comparison to the size and scope of payments the Treasury could have to forego if it can no longer borrow money come Aug. 2, offers a useful case study in the real-world consequences that result when the U.S. government doesn’t seem like the sure bet it has always been.

“It creates doubt, and I think that’s the real lesson,” he said. “The market has a much longer memory than individuals.” . . .

Another problem is that the problem with the 1979 payments had nothing to do with the debt ceiling. It came about from an error in word-processing. From an NPR interview:

SIEGEL: And take us back to the spring of 1979. How was it that the Treasury did not redeem some Treasury bills that came due in April and May?

Prof. ZIVNEY: Well, that's a little bit of a mystery even to me. I believe it was similar to the situation we have now, where Congress was debating raising the debt ceiling. And in the process of all these - the wrangling going on, some of the little paperwork details, like writing checks, got lost in the process. And so they didn't get written.

SIEGEL: The Treasury actually pleaded that they had bookkeeping problems, computer problems in paying off people.

Prof. ZIVNEY: Oh, they said, yes. They said there were technical errors, word-processing errors. But I'm sure the thousands of people that did not receive their $120 million were not, you know, mollified by hearing it was just a technical difficulty. . . .