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The Present Value of `Full Faith and Credit’, Which the Republicans Want to Destroy

Like spoiled children who are about to be punished, Mitch McConnell, John Boehner and the rest of the Republican wrecking crew want to destroy $3 trillion of America’s wealth.

The wealth in question is the present value of the `full faith and credit’ of the United Sates of America, the guarantee that holders of Federal debt will be paid off in full. The `full faith and credit’ has been built up over two centuries, through wars, recessions and depressions, and is a national treasure, belonging to all of  the American people.

However, `full faith and credit’ is not just a touchy-feely concept. It has a definite value in hard, green cash, amounting to $10,000 for every person in America. If, as the Republicans threaten to bring about,  the Federal government defaults on its obligations, even briefly, the coveted AAA rating of US bills, notes and bonds will disappear, almost certainly forever. Even if debt payments resume, it is likely that the rating of US debt will be impaired for years, leaving a toxic financial legacy for the children and grandchildren that the GOP claims to act on behalf of.

So, a talking point that any half-competent Democrat should be using is,

The Republicans want to destroy $3 trillion in national wealth overnight, stealing $10,000 from every man, woman and child in America.

The back-of-the-envelope calculation follows. (This  answers a question I raised in a comment on Scarecrow’s diary this morning.  I’m sure that someone with more knowledge of finance or economics can do a better job of this, but it’s good enough to serve its purpose.)

Amount of outstanding US government debt: $14 trillion

Average maturity of US debt:   5 years

Interest rate on 5 year US Treasury notes:   1.72%

Interest rate on 5 year high yield corporate debt: 6%

(This last is a reasonable approximation, pulled from the previous link. The high yield (sub-investment grade, a/k/a junk bond) market covers an incredibly wide range of companies. But it is a decent figure to use, and if anything is  too low: most high yield bonds never default. A defaulting sovereign state, even the USA, would probably need to pay even higher interest rates.)

Debt service on US debt at current interest rate: $14 trillion x .0172 = $240 billion/year

Debt service on US debt at junk interest rate: $14 trillion x .06 = $840 billion/year

Savings due to `full faith and credit’ of the US government:  $840 – $240 = $600 billion/year

Total current value of `full faith and credit’ = $600 billion/year x 5 years = $3 trillion

Value per American = $3 trillion / 300 million people = $10,000 / person

Heckuva job, Miss McConnell and Tanman.

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