Earlier today, while discussing the implications of a US debt downgrade on a SIFMA call, JPM head of fixed-income Terry Belton told listeners that a US downgrade could cost the US an additional 60-70 bps in incremental interest. That's per year. He also added that US asset managers are unlikely to sell Treasurys on a downgrade, but that's irrelevant. Nobody can predict what all the knock off events from a US downgrade would be, as the Citi presentation from yesterday indicated. Should there be a downgrade, investors may not sell Treasurys, but they sure will be forced to sell other lower rated instruments to keep the overall rating distribution of their portfolio in line with mandated rating requirements. Which in turn, following margin calls, will result in, you guessed it, selling of Treasurys. Yet this debate is the topic of another post. What is more important is that on the same call, Belton said that a 70 bps increase in interest would result in an incremental $100 billion in interest expense each year.
Zero Hedge
BP = "Basis Point" = one percent of a percentage point of interest. So 60-70 bps means the interest rate paid by the US Treasury would, in Mr. Belton's estimate, go up by 0.6 to 0.7 percentage points. When you owe $14T, raising your interest costs by 0.6% costs you $84B per year. Going up by 0.7% is $98B / year. And since the budget won't be balanced for the foreseeable future, the new debt incurred every year will also pay that higher interest rate.
Using the 10-year projections common in discussion of the debt ceiling, that's going to be $1T in additional interest expense incurred in an effort to reduce the deficit.
THIS IS MADNESS
In case it is not clear to everyone, the Republicans don't care about the deficit. Not at all. Not to the slightest degree. They care about reducing tax rates for billionaires, and they will destroy whatever they must destroy and send the economy of the entire world into a tailspin in their efforts to do it.
If you find yourself starving to death and desperate in a few months or years, remember where to aim your anger and / or pitchfork. There is blame to go around, yes; but for every grain of blame sand you can legitimately give to Obama and the Democrats, there is a Mount Everest of blame for the Republicans and their plutocrat masters.
By the way, that downgrade is now inevitable. It's coming. The Republicans by their insistence on destroying entitlements have once again starved the beast - this time by causing $100B in interest payments that will do nothing to create American jobs or help American families.