Economics

The Constitutional Option: If 14th amendment were used to bypass debt ceiling, would anyone buy US debt?

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As we approach another debt limit deadline, the idea that the president should use language of the 14th amendment (“the validity of the public debt of the United States, authorized by law, . . . shall not be questioned”) to ignore the debt limit has been raised again, this time most prominently by House minority leader Nancy Pelosi. The idea, it appears, is that the 14th amendment language enable the president to issue debt in order to pay the nation’s bills even though the debt exceeds the congressionally established limit. Recently, the administration has said that White House lawyers have not found the argument persuasive and thus that the president would not be pursuing this option. However, that’s not the only reason the 14th amendment caper was never viable.

Much of the debate about this issue has been among lawyers interpreting the text and history of the 14th amendment and, as interesting as this might be for lawyers, it is a waste of their and everybody else’s time; the very fact that there is uncertainty about the meaning of the phrase guarantees that the provision will never be used.

US government debt is frequently referred to as “risk free,” and it is so in substantial part because its legal validity as an obligation of the United States is not in doubt. However, the existence of a debate about the meaning of the 14th amendment as authority for bypassing the debt limit nullifies the risk free character of the debt that would be issued under that constitutional provision.

In other words, even if the debt were to be issued, there would be no buyers unless the interest rate were high enough to compensate for the uncertainty about its validity. That rate would probably have to be quite high, given the fact that the debt would be worthless if the Supreme Court were ultimately to determine that it was issued in violation of the law.

Indeed, the yield on all US government debt would probably rise after the issuance of a questionable debt instrument, as investors began to doubt the sanity of those in charge at the Treasury.

14 thoughts on “The Constitutional Option: If 14th amendment were used to bypass debt ceiling, would anyone buy US debt?

    • There is zero chance that the country would have to default on debt if the debt ceiling never changed. Federal revenues vastly exceed the amount required for debt service. Defaulting would be a choice — and one proscribed by the constitution.

  1. There are so many problems with this commentary that I don’t really know where to begin. That said, let us take it one point at a time.

    US government debt is frequently referred to as “risk free,” and it is so in substantial part because its legal validity as an obligation of the United States is not in doubt….

    Risk free? Have you every had a chat with anyone from a sovereign fund? I can assure you that few serious investors outside of a small group of nutcases in the US would consider USTs risk free. The biggest thing that I hear about is the inability of some sovereign funds to get out because that would trigger a series of dire events that would damage their own economies and increase their liabilities.

    In other words, even if the debt were to be issued, there would be no buyers unless the interest rate were high enough to compensate for the uncertainty about its validity.

    There are not many buyers now. If you look around at the data and the analysis it looks as if the Fed is the purchasers of most of the new debt being issued by the Treasury.

    That rate would probably have to be quite high, given the fact that the debt would be worthless if the Supreme Court were ultimately to determine that it was issued in violation of the law.

    The rate should be higher today. It isn’t because it is being manipulated by central banks, not because of any true signals from the markets.

    Indeed, the yield on all US government debt would probably rise after the issuance of a questionable debt instrument, as investors began to doubt the sanity of those in charge at the Treasury.

    It will rise regardless because the markets cannot be manipulated forever. Look for foreign central banks to use their reserves ‘creatively’ as they try to ensure that they are not stuck with worthless UST paper after the currency has been devalued and the talk of default gets louder.

    Do you really think that the Generation Y people will work to pay off all the debts accumulated by their parents and grandparents? Foreigners don’t.

    • I used to work in the field of investment performance measurement. Modern portfolio theory equations require a value for investment return that is designated “risk free.”

      The value that used is 3-month T-bills, because it’s considered as close as one can get to return without risk. The three-month period makes the inflation risk minimal and, at that time (’80s – ’90s) at least, default risk was zero over 3 months (or so vanishingly close to zero as to be meaningless).

      The designation “risk free” is entirely for the purpose of these calculations, and is only applied to short-term obligations. Only the naive would have ever considered even those short-term Treasurys absolutely risk-free in the real world. (If they were, the rate would never change.)

      Even when the default risk for all Treasurys, of any maturity, was considered zero, longer-term Treasurys were still considered to have risk (primarily inflation). Now even default risk is, apparently, no longer out of the question (at least to some analysts).

      The authors usage of “risk free” clearly only applies to default risk. When I was involved in the field, I never heard the Constitution given as the reason Treasurys were considered to be without default risk (I don’t claim to have heard or read everything on the subject). It was more like U.S. govt default was a possibility so remote that it wasn’t worth considering in investment analysis. It was like, “Well, if we get to that point, things will be so bad that all of our analysis will be worthless.” (The actual explanation I remember hearing was expressed in a considerably more obscene way!) I wonder what investment analysts are thinking now that we’ve reached the point of considering default possible.

      • The designation “risk free” is entirely for the purpose of these calculations, and is only applied to short-term obligations. Only the naive would have ever considered even those short-term Treasurys absolutely risk-free in the real world. (If they were, the rate would never change.)

        Yes, but most people look at ‘risk free’ and think safe.

        The authors usage of “risk free” clearly only applies to default risk….

        It does not matter. You can wake up and find the currency devalued by 50% overnight. There is clearly risk in all treasuries that is underestimated by the talking heads that write or interpret most of the studies.

        • “Yes, but most people look at ‘risk free’ and think safe.”

          Because they don’t have any understanding of the facts of life in the context of investment. In investment, there is no absolute safety, only relative safety.

          “There is clearly risk in all treasuries”

          Yes, there always has been and it’s certainly greater now. If inflation picks up, the Treasurys being issued at current rates will drop in value (if sold). If held, the interest payments will be much reduced on an inflation-adjusted basis.

          Are commentators underestimating risk? Almost certainly. When the unexpected happens, most analysts will be taken by surprise. The unexpected is, by definition, something that is not what people expect (other than, perhaps, a very few people). How many analysts warned of the housing price crash? Very few. Almost everyone was sure it couldn’t happen.

          • Because they don’t have any understanding of the facts of life in the context of investment. In investment, there is no absolute safety, only relative safety.

            But even there there is a big problem because treasuries are no longer safe. In fact, if you look at real purchasing power it is doubtful that they have been since the end of Bretton Woods.

            Yes, there always has been and it’s certainly greater now. If inflation picks up, the Treasurys being issued at current rates will drop in value (if sold). If held, the interest payments will be much reduced on an inflation-adjusted basis.

            Inflation is a lot higher than is being reported. The same methodology that we used during the 1970s would show an inflation rate of more than 5% at a time when treasuries are yielding less than 1%.

            Are commentators underestimating risk? Almost certainly. When the unexpected happens, most analysts will be taken by surprise. The unexpected is, by definition, something that is not what people expect (other than, perhaps, a very few people). How many analysts warned of the housing price crash? Very few. Almost everyone was sure it couldn’t happen.

            Almost all of the Austrian School economists warned of the housing crash because they understood what was happening. You must be thinking of the Keynesians and the Monetarists.

          • Vangel -

            “Almost all of the Austrian School economists warned of the housing crash”

            Doesn’t surprise me – those are the people I, personally, would be more likely to pay attention to. My point is that those economists are among the “very few” I referred to. Most analysts and economists were ignoring them as “crackpots.”

          • Doesn’t surprise me – those are the people I, personally, would be more likely to pay attention to. My point is that those economists are among the “very few” I referred to. Most analysts and economists were ignoring them as “crackpots.”

            But you can’t really be a Keynesian or monetarist and a credible economist at the same time. Those groups have sold their souls to the governments and institutions that employ them and offer justification for the type of actions that can never really be justified on moral or even utilitarian grounds. This is why so many kids attended Ron Paul rallies and offered so much devotion to his campaign. They finally heard someone who told them things that made sense and did not talk down to them as the Keynesians and monetarists do.

          • Seems we don’t disagree on anything much. Except that, possibly (I don’t know), you might be a little more surprised that people are fools and a little more hopeful that they will wise up.

          • Seems we don’t disagree on anything much. Except that, possibly (I don’t know), you might be a little more surprised that people are fools and a little more hopeful that they will wise up.

            Having been brought up with the public education system I am not at all surprised that so many people can be such fools. While I believe that they will wise up I do not expect that to happen until long after reality has taught them a very hard lesson that wipes many of them away.

            While waiting for my car to go through its maintenance check I sat at a table in my local book store and had a chat with a German gentleman who was an Obama hater and knew a bit about the politics and reality of the energy sector. After a while we got around to the question of inflation and he told me a long story about his post war experience. Unfortunately it was WWII that he was talking about and that took us to the subject of literature that might deal with the previous inflationary period that ended so badly in the 1920s. He told me that was familiar with Hand Fallada and had read some of his books in the original. As he talked he finally figured out the point that I was making. He had originally asked about how far into the future a hyper-inflationary event could come given the data that we had now. In quite a short time he figured out that an event that is exponential tends to begin slowly but gets out of control in very short order. Most people will not understand that until it is too late. They will see some of their purchasing power falling and will stay put only to panic late in the game and use their dying money to purchase whatever goods are left behind, no matter how inappropriate the purchases may be. Before he left the bookstore he bought a copy of Wolf Among Wolves so that he could read it again and got a book on buying gold and silver coins. Most people will not be in a position to buy what they need to get them through a crisis and will wind up wiped out and lose most of what they have accumulated in their lifetimes. Luckily, the cleansing of debt will leave their kids free and clear to try to make a new start.

  2. Everyone here ought to read the third of the Gold Clause Cases [Perry v. United States, 294 U.S. 330 (1935)], the general dissent to all of them, and the Virginia Coupon Cases (cited by the opinions). This was, as far as I know, the last time the Court considered section 4 of the Fourteenth Amendment, and it found what we are doing right now unconstitutional.

    What’s proposed by the Pelosi cult would be doubly so.

    Broaching the debt ceiling does not require the federal government to default its debt. It would require Congress either to cut the spending or raise taxes to meet the obligations. Although we are accustomed to thinking of entitlement programs as absolute and permanent, the legal truth is that they are funded with transfer taxes and can be terminated by Congress at pleasure. In addition, if necessary, Congress could impose direct taxes, e.g., a poll tax or property tax, on all property subject to its jurisdiction located anywhere on the planet. Granted Congress does not want to do that, but if we actually hit a debt wall, that would be its constitutional obligation.

    If Perry is to be credited, it would NOT be permissible simply for Congress to print the money and thereby “pay” the creditors. No one can guarantee his or her debts by repudiating them. Indeed, what the Court most likely would say is that, to get out of a hole, the first thing one needs to do is stop digging!

    I personally think that Republicans in the House should oblige the demodonkeys to eat their own dog food. Put a package on the table which balances the budget and raises taxes — on demodonkeys! Let such a bill come to a vote unamended and unamendable, then show up for final passage and vote “present.” Were that tried, were the demodonkeys to remain adamant on maintaining the current level of spending, they would have to almost double everyone’s taxes and take responsibility for that, or acquiesce to massive cuts. Needless to say, were they to double everyone’s taxes, they would not survive the next election, and with a sudden two-thirds majority in each chamber, the Republicans simply could go around tthe President’s road blocks by amending the Constitution as necessary.

    The bottom line is that we have adopted a predatory philosophy of government which eventually must consume itself. But, if we love our children and our children’s children’s children, we will realize that reform requires a principaled and unyielding stand now. My campaign slogan was unmistakable: “If not you, who; if not now, when — do we pay back the Chinese?” Ask yourselves what a token payment of $100 billion would do to the current system of proto-fascism? To be $100 billion in the BLACK, we’d have to cut the budget by more than 40 per cent or raise taxes on a massive scale. Yet, were a future president to maintain such a policy across the eight years maximum he’s allowed to stay in office, he’d only pay back about HALF of what Obama & Co. have borrowed in ONE YEAR!

    We would be looking at 75 years of austerity AT LEAST to pay back the $17 trillion we owe!

    That’s almost three generations! Three generations who, in the alternative would be expected to suffer massive taxation without representation (and that also is unconstitutional).

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