More on Asterisk Bonds from TPM Reader MM …
I think you’re exactly right. Any Treasuries auctioned during a time of dispute would have to be sold at some sort of discount. It’s one thing for the credit rating to take a hit. This would be about actually issuing disputed bonds. Bondholders might rightly reason that they have a legitimate claim but the beauty of Treasuries, as opposed to other sovereigns and corporate securities, is that investors do not have to worry about things like that, ever.
Add the spectre of Tea Partiers on television screaming about “Obama Bonds,” and making loud threats about being unwilling to “force the American people to pay for them,” and you definitely have a scenario where the price of U.S. Treasury bonds drops and interest rates rise.
A legal dispute over the validity of the U.S. debt, unless the Supreme Court were to somehow swoop in and solve it before the first disputed auction seems potentially far more harmful than the 2011 debt ceiling fight.
Also, it will raise the costs of borrowing for the U.S., perhaps permanently, which will slow economic growth and turn a manageable long-term debt problem into a far more immediate one. It could potentially starve the beast that Grover Norquist never could.