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. As a reminder, this is roughly the amount that the NPV of a realistic deficit reduction plan over 10 years would chop off from the US deficit on a yearly basis. Simply said: the US downgrade alone, now virtually taken for granted by everyone, will offset any beneficial impact from any deficit reduction that will have to happen for the debt ceiling to be increased. And that, ladies and gentlemen, is why cash flows matters.

More from Reuters:

"That's on the order of $100 billion over time that we will add to our funding costs," said Terry Belton, global head of fixed income strategy at JPMorgan Chase. He was speaking on a conference call organized by the Securities Industry and Financial Markets Association, also known as SIFMA. Over time, he said Treasury yields could rise 60 to 70 basis points on a credit downgrade -- "a huge number because we're talking a permanent increase in borrowing costs." That would make it more costly for consumers and business to borrow money and could land the economy back in recession. A default on the country's obligations would be even more disruptive, call participants said, and could ripple across financial markets, but was less likely. In the short term, a downgrade would have a more subdued impact on markets, Belton said, with bond yields likely to rise five or 10 basis points. Markets had feared a move to AA would spark forced selling, but Belton said "most investors have indicated they would be able to continue to hold them." The "wild card" remains foreign demand over the longer run, sine the U.S. depends heavily on overseas investors -- mostly central banks -- to finance its deficit. Belton said he expected demand for the $99 billion worth of fresh two-, five- and seven-year Treasury debt this week to be "on the weak side" and warned of even more concern if a debt ceiling impasse forces Treasury to postpone future auctions. He said an eight-day auction delay surrounding a debt ceiling debate in 1995 cost the government 25 extra basis points in financing costs.

As yes, but back in 1995 the global economy was not run by a global central planning committee whose only purposes was to intertwine everyone in perpetuating the global debt-funded ponzi. This time nothing can possibly go wrong... or at least until such time as the house of cards propped up by Bernanke et al becomes so big that it finally collapses (the Fed can push the laws of finance and physics, but not break them) that the only rescue is for the Alpha Centuri central bank to come and bail out the world.