Some people apparently believe it's no big deal if Republicans block an increase in the federal debt ceiling and allow the government to default on its debt obligations. They owe themselves an ice-cold splash and another look.
Of the current $14.29 trillion in federal debt, $8.1 trillion is publicly held, and $6.2 trillion is held by the U.S. government. Of the publicly held debt, China, with $1.3 trillion, is the largest buyer of Treasury bonds. Other foreign countries combined hold $3.2 trillion, while a range of investors -- individuals, pension funds, banks, state and local governments and other buyers hold $3.6 trillion.
Of the $6.2 trillion held by the government, $2.7 trillion is in Social Security trust funds. Other U.S. government agencies have $1.9 trillion, and the Federal Reserve systems has $1.6 trillion.
A default on dollar-denominated debt would rattle investor confidence in the dollar, reduce investments and the dollar's value relative to other currencies, and drive up the cost of imports, especially oil, which accounts for half of the nation's trade deficit.
China, as the largest holder of U.S. debt, would be constrained from dumping its Treasury notes because that would further diminish the value of its dollar accounts. However, other countries with substantial dollar investments -- across Asia and Europe -- might feel less constrained.
The vast amount of U.S. debt held abroad illustrates the dollar's role as the world's most reliable reserve currency, but that would change -- unfavorably for America's economy -- if a default finally breaks international confidence in the dollar. Should that happen, interest rates domestically would soar as investors abandoned Treasury notes. That would force the Federal Reserve to ratchet up interest rates to entice wary investors and cause the nation's economy to shrink, bringing on recession, raising joblessness, accelerating price hikes in goods and commodities across the board, and causing cuts in government services while driving up government costs for unemployment insurance and health care.
Economists say there is no question that a default would have severe and lasting consequences. Question, is the tea party listening?