How would it play out if the Treasury decided to ignore the debt-ceiling outright, and continue to service the national debt? Imagine a policy that says, "In accordance with the Fourteenth Amendment, we will continue to pay bondholders their due monies" or something like that.
I don't think the 14th amendment gives the Treasury that power, but that's not what I'm asking. Imagine they decide to interpret it that way. The Supreme Court rules against them. They ignore the Court and continue to pay.
What happens then?
I guess what I'm getting at is: what is worse, a Constitutional Crisis? Or a default on our debt? To me it seems like the better outcome would be to ignore the Court altogether on this issue.
(I'm sure I'm making naive assumptions in this questions. Let me know!)
They would gladly facilitate an option the Treasury pursues in its role as fiscal agent, since they can always claim that it was the Treasury’s decision and they had no other option as fiscal agent (which happens to be true).
The end result is the Federal Reserve would be forced to follow its unwritten 0th commandment: maintain the integrity of the payments system. As a consequence of that imperative it would be operationally forced to continue to ensure Treasury auctions and payments continued to go through. Presumably accounting gimmicks would be employed to avoid “technically” exceeding the debt ceiling, like simply allowing Treasury to overdraw. But at the end of the day there would be no constitutional crisis. At least not a forced one. Of course we shouldn’t underestimate the power of stupidity so it can’t be ruled out entirely.
Capital will never let either scenario occur. It's all just theatre. The US will never default on debt, it's a convenient negotiation tactic to waterdown more progressive legislation. Just like how there's always 1-2 democrats that just can't get behind progressive legislation.
> Capital will never let either scenario occur. It's all just theatre. The US will never default on debt, it's a convenient negotiation tactic
That's true until it isn't. I hope you're right, but I worry that you're probably overestimating our politicians. They're not all playing 5D poker. Some are just plain stupid.
Yep. Maybe when this started it was theater, but more and more i'm wondering if we've got enough idiots who think they stand to gain from something like this. It won't be some shadowy cabal of actors trying to overthrow things, it'll just be a bunch of headline hunting lunatics who can't think past the next hour.
Have you even read the Federalist papers? A huge amount of consideration was spent on making sure a vocal and scheming minority could not usurp their design.
Defaulting on the debt would be an erasure of an entire political party nearly overnight. There is only one party that even attempts to hold the country hostage via debt ceiling tactics, and they are incredibly beholden to their corporate masters who would go absolutely nuclear on them should they actually follow through with that threat.
The US can supply whatever amount of money is necessary to service any conceivable amount of debt. The US absolutely will debase its currency into toilet paper, but default is not a certitude.
And it's not theater. When these debates occur the legislature is forcing the executive to face taking extraordinary steps. That's leverage used to negotiate budget deals.
The Federal Reserve can choose to print the money the Government spent. They're not the same entity and they don't have the same goals. If the Government spent the money and the Federal Reserve doesn't want to print it, that's uncharted territory.
Thus, the "extraordinary steps" I mentioned. Some have argued the executive has the authority to do any conceivable thing necessary to ensure that the "validity of the public debt ... shall not be questioned," to include ordering the Fed to honor Treasury overdrafts.
Another extraordinary step by the Treasury would be minting legal tender and depositing it with the Fed. The so called "trillion dollar coin" scheme.
At the end of the day they'll do what they have to do. This story makes it very clear that the Fed is not interested in becoming the political target over US default, so don't imagine they're going to take some heroic stand.
> include ordering the Fed to honor Treasury overdrafts
The Treasury hasn't come close to proposing over drafting. It would sell Treasuries and then have cash. If that became problematic, it would mint. The Fed cannot, by law, lend money to the Treasury. It can't even purchase Treasuries from them directly.
By law the US government cannot permit default. Does that give the executive the power to trump limits on the Fed?
We'll see.
Others argue minting is more palatable. I think legally that's true. I think politically that's false: there is a visceral reaction to any talk of "printing." The various euphemistic ways the Fed can handle it will be preferred. Of course it will end up in front of SCOTUS, but that's a political win: SCOTUS becomes the bad gus trying to "destroy democracy". Or something.
> If the Government spent the money and the Federal Reserve doesn't want to print it
What does this mean? Even if a Treasury auction fails, the Treasury has the power to mint currency. It could literally just deposit paper representing the $200bn of gold at Fort Knox and have money in its Fed account.
> Also uncharted territory. So far, that's never been tried.
Minting is more precedented than the Fed. Functionally doing this is trivial. It's legally asserting the supremacy of the 14th Amendment over the Public Debt Acts.
For example FDR defaulted on the debt when he refused to pay back bonds denominated in gold with their face value and instead paid them back in devalued currency. The Supreme Court ruled that he had acted unconstitutionally, but also did not force the government to pay back the full value as FDR had said he would ignore such a ruling.
This is why the Supreme Court wouldn't rule against this. It's a game of chicken, but it's very important to the Court to never make a decision that simply can't be executed by the elected branches. And the individual human beings on the Court know this and enough of them would find some rationalization they could live with to avoid such a ruling.
I think you're right. If I'm sitting on the court, I might accept whatever flimsy loophole the Executive Branch provides, and say, "Congress is free to clarify their intentions at any time to resolve this impasse".
Now the ball is in the House's court. Are they going to vote to positively default? (Rather than passively not act before some deadline, like how they do it now?) I bet not.
Given the 14th amendment exists and its purpose was in fact to assure the treasury would always pay its debts and the constitution overrides any law, it wouldn’t be a very flimsy loophole to say congress would need to clarify possible up to and including an amendment. The debt ceiling isn’t specifically about paying debts but about authorizing new borrowing. So while the treasury may not be able to legally issue debt to pay existing debt, it would be required to pay debt. This is of course the starve the beast goal of the debt ceiling to force spending cuts to pay the debt by making the debt payment so vast that the federal government would become a shadow of itself in that eventuality. However since the law has never been contested it’s not clear it would work.
But the treasury of course has many other ways of paying debts, including simply issuing currency. Even if the 14th amendment doesn’t invalidate the debt ceiling, the treasury still must pay the debts, and doesn’t have to do so by cutting spending. It would however be more orderly and strictly better for everyone if the 14th amendment did invalidate the debt ceiling in a situation that questioned the treasuries ability to make whole debts without resorting to disruptive measures.
The 14th amendment doesn't say the Treasury must always pay its debts. It says everyone has to act as if the Treasury will always pay its debts. It could default tomorrow, and you'd be constitutionally required to accept T-bills at face value anyway.
"The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned."
It is strangely worded, but I think it could be interpreted to also mean that the government shall not do anything that would call the validity of the debt into question.
It doesn't really make sense to pass an amendment that tries to mandate the perception of the validity of the debt. if the government stops honoring it, then the invisible hand of the market will consider it invalid.
That would be a reach. The non-reaching interpretation is the face value one: the validity of the public debt ... shall not be questioned. It's hardly the most anti-market law around - the US has farm subsidies, and some countries even have price controls.
What would that even mean though? Bonds are sold at auctions, and already sell at a price different from face value. The difference determines the yield.
You could have "no one questioning the validity" but people are still going to either not participate in the auction, or bid only for high yields.
One of the factors in evaluating a case is whether the proposed remedy is feasible or even possible. I'm not sure what forcing everyone else to "consider valid" a government bond that is not being honored.
Do you arrest and imprison anyone who reveals that they are not getting paid on their bond at maturity? Do you force buyers to buy it at face value, even though they know it will not be honored?
I think it’s even stronger than that. It doesn’t just compel the president, which is a political office, but it compels every civil servant in the treasury as it’s a constitutional mandate. So in theory even if the president declares no debt payment, the treasury would still make the payments.
On my latest re-reading of it in your comment, it sounds more like it's saying, "shut up, you lost, the measures taken to suppress your rebellion are valid, move the frak on".
The context at the time was doubt that the treasury would pay its debts, because it was widely viewed that it would not post the civil war. The language is not clear, but the intent as I understand it from a historical perspective is pretty well understood to mean the treasury must always pay its debts. The language continues to clearly delineate debts accrued by the confederacy (insurrection) as NOT payable, which further enforces the topic is payment of debt.
You have to recall the context in which those provisions were passed: coming out of the Civil War, you had both Union and Confederate bonds and other public debts used to finance the war. Amongst the other conditions upon which the rebellious states were re-admitted to political authority were the cancellation of Confederate debt (the Union was not going to pay for the wages of rebellion) and the guarantee of Union debt (so that Southern and Western states could not collude in Congress to prevent repayment of that debt), both of which were written into the Public Debt Clause. So the clause was absolutely meant to restrict the government's ability to repudiate debts other than those explicitly excluded, because you had a Republican Congress working to tie the hands of a potential future Democratic one. (N.B., I'm not exactly sure what you mean by "required to accept T-bills at face value" -- you can buy T-bills and TIPS on the secondary market at whatever price the market sets. If the US were to start defaulting on its debt, then that price ... would not be as stable as it has traditionally been.)
> I think you're right. If I'm sitting on the court, I might accept whatever flimsy loophole the Executive Branch provides, and say, "Congress is free to clarify their intentions at any time to resolve this impasse".
See, that's why you aren't on the Court.
What the kind of people that actually get put on the Court would mostly due to allow the action without endorsing its legality would be:
(1) Be sticklers about standing and other threshold issues (ripeness, mootness, etc, but standing is the big and most useful one here); almost no litigant other than Congress acting as a whole will have the kind of particularized injury to allege that would give them standing to challenge paying the debt (an actual creditor might have standing the other way, but that's not the scenario we’re concerned with.)
(2) If you really can’t kick the case for standing or other threshold issues (well, first, amateur, but...) then invoke the “political question doctrine” to avoid it anyway.
Oh you just gave me an idea for another hypothetical. If the House was unable to elect a Speaker during the time the debt ceiling was breached, would they even be capable of bringing any action before the Court?
It is only a rule of the House that limits business that can't be done pending election of a speaker (and before the recent crisis was resolved, one of the solutions proposed was changing the House rules to allow more with an Acting Speaker), so, not in any way that the House itself couldn’t bypass, even without electing a Speaker.
If there’s anything I’ve learned in the past decade is that way, way too much of our government relies on people in power being rational actors with good intentions.
If they wanted to raise hell they could simply make the worst decision and there’s nothing that can be done about it.
I've always thought of it as an attempt to engineer peer-pressure. Build institutions that recruit like-minded people in the hopes that when faced with tremendous pressure, the group can force individuals to fall in line around a predetermined principle.
My take is a bit different to yours. I think they didn't anticipate a concerted effort to undermine like-mindedness of the people comprising institutions in an attempt to make an egalitarian society. It's not that long ago that people appreciated the difference between social exclusion and custodianship, and recognized that some amount of gatekeeping is essential to institutional function.
To be clear, that same gatekeeping can be and has a times been perverted into social exclusion, but the problem at hand IMO is the discarding of the baby with the bathwater.
The justices put a ton of effort into maintaining the courts legitimacy. A large part of that is not making decisions that the vast majority of the country disagrees with, even if there's no real legal reason to do so. I think this would be one of those situations.
Some of the justices seem to care somewhat about what people think of them. Some don't seem to care much at all. In general I don't agree that the court puts that much effort into appearing legitimate.
If the Supreme Court cared at all about appearing legitimate, they would have made the effort to remove Justice Thomas, who keeps taking outright bribes in order to influence his decisions, and the public is completely aware of it with documented proof.
You have very different definitions of "the public" and I promise you that yours is a hell of a lot smaller.
People who are aware of who Justice Thomas even IS would still be a vastly smaller circle than the number of people who would be affected and have very strong opinions on a US default (although not until it happens).
Most people (and more than is the case for any other Supreme Court Justice) know who Thomas is, and most of those (by a wider absolute than any other justice, though by a smaller relative margine than Kavanaugh or Barrett) who do have negative impression of him.
Supreme Court Justice Clarence Thomas has been friends with Dallas billionaire Harlan Crow for 27 years. Crow said that he and his wife have been friends with Thomas and his wife Ginni since 1996.
Is there proof they were bribes as opposed to the innocent explanation that they are just family friends, and it's not unusual for billionaires to offer a free ride to their non-billionaire friends on vacation?
Giving and forgiving a $200k loan, buying his mom's house (while still allowing her to live there free for over a decade), and paying for his kid's private schooling while you have cases in front of a justice has the appearance of impropriety.
My corpo policy doesn't even allow me to accept $20 of gifts from friends or acquaintances if there is also a sniff of business relationship there as well. The goings on between the Justice and his friend sure don't smell right, to me.
The pertinent questions are, what are norms for this kind of thing in the rest of the federal court system, and is Thomas’ behavior in the same universe as those?
The answers are “you turn down gifts of far, far less, from much less-risky associates” and “not in the same multiverse, even”.
This seems so far from the present-day reality that I don’t know where to begin. Thomas is demonstrably taking bribes. Kavanaugh had a large amount of debt he claimed was from “baseball tickets” that just magically disappeared. Cony-Barrett is part of a cult. Meanwhile, the court is making wildly unpopular decisions left and right and openly states no one can hold them to account for anything they do or say, on or off the bench. They have zero legitimacy.
The public plainly does not care about the bribes. Their decisions have been unpopular, but not wildly so. The courts approval rating is sitting at 40% which is probably fine. The issue is when it starts approaching single digits.
For starters, the supreme court would not do anything until (unless!) someone challenges the treasury ruling, and there would inevitably be some nontrivial time gap between the two sentences in your scenario of "Imagine they decide to interpret it that way. The Supreme Court rules against them." during which they would pay out the funds.
But after a binding ruling is issued, I'd assume there would be personal sanctions, liability and likely criminal charges against any individuals involved in defying that decision.
That seems like a dodge. There is always someone willing to challenge anything the federal government does. It would be entirely up to the Court how quickly they'd want to hear the case. It could be immediate if they want.
> I'd assume there would be personal sanctions, liability and likely criminal charges against any individuals involved in defying that decision.
The president would almost certainly not want to take responsibility for the resulting economic implosion, and would order the executive to ignore the court ruling. Then it comes down to a mix of loyalties and individuals' beliefs around what would cause the least damage.
It's far more likely that a ruling like that would be the end of the court's power.
Yes, in practice a ruling like this might remind everyone that there is no clause in the Constitution giving the Supreme Court the power to review the other branches' actions. They grabbed that power themselves in Marbury v Madison.
> But after a binding ruling is issued, I'd assume there would be personal sanctions, liability and likely criminal charges against any individuals involved in defying that decision.
That's not accurate:
Power in the US government is of course separated between the legislative, executive, and judicial branches, and each has checks and balances on the other two.
One check the executive has on the judicial is to ignore its rulings. The executive can't do it all the time, obviously, and afaik the US also generally embraces 'judicial supremacy', the idea that the judicial branch generally gets the last word. Also, I don't recall the judiciary sanctioning indiviuals in the executive branch, but I could be wrong [Edit: of course I'm wrong, see below]. I would guess they've never sanctioned a president.
Perhaps the most famous use of this power was in Worcester v. Georgia; when his favored side lost the case, President Andrew Jackson reputedly said, "[Chief Justice] John Marshall has made his decision; now let him enforce it." (Inspiring rhetoric, but it led eventually to Native Americans having their land stolen and many being marched to their deaths.)
> I don't recall the judiciary sanctioning indiviuals in the executive branch
Every time someone in the executive has been held in contempt of court in relation to (but usually exceeding) their official duties, the judiciary sanctioned individuals in the executive branch.
That said, the President could pardon everyone involved.
I think the Supreme Court might rule that the new debt issued when the debt ceiling was exceeded was not valid. The most likely way this could happen is if a new administration refused to pay the obligations due on bonds issued in excess to government appropriations. Typically the 14th amendment would actually be seen as requiring the payment of this debt, but if someone challenged the non-payment the Supreme Court could rule the debt was not issued in compliance with law.
There is an additional player, the Federal Reserve. The Treasury can write a check, but that check is to be drawn against an account in an actual bank -- ordinary commercial banks. Those banks have to follow the rules of banking and can't just honor checks because they're the government.
So in the scenario you describe, the Treasury writes checks, and they bounce. That would be... bad.
The Treasury would have to collude with the Fed. Something like, the Treasury sells some bonds to the Fed, and the Fed buys them, putting the money into the Fed account. That's illegal, because Congress didn't authorize it, and they try to put the Treasury secretary in jail.
The Supreme Court says "We have no idea what's going on, this is up to you jackasses. Go legislate something." A whole bunch of stuff happens, but it all comes down to DC in flames and the country gives up.
> Treasury can write a check, but that check is to be drawn against an account in an actual bank -- ordinary commercial banks
The Treasury banks with commercial banks, but it also has an account at Fed. That said, banks aren't legally obligated to accept its cheques.
> an additional player, the Federal Reserve
That's what this memo describes [1]. In essence, the Fed says it will defer to the Treasury on whether debt is legally issued.
> Treasury sells some bonds to the Fed
The Fed can't do that [2]. What they can do is announce to the market that they won't treat post-ceiling debt differently from pre-ceiling debt. That's what this memo says.
It may not be able to continue doing that if e.g. SCOTUS rules Treasury exceeded its authority. But at that point, the Treasury could start testing its minting power.
In summary, the Fed isn't a player in the legal part of this game.
> How would it play out if the Treasury decided to ignore the debt-ceiling outright, and continue to service the national debt?
As the article notes, the Treasury already does things to circumvent the debt ceiling, and nobody cares. The article is just discussing further things that the Fed could do to help the Treasury circumvent the debt ceiling if necessary.
In other words, I don't think the debt ceiling issue will ever trigger a Constitutional crisis. (Unless, of course, you think, not unreasonably, that all this circumventing of laws passed by Congress already is such a crisis, but that's a whole other discussion.)
> The Fed is saying they'll defer to the Treasury on whether debt is legally issued.
Yes, while the Fed continues to do various things behind the scenes to make sure that the Treasury can plausibly claim that the debt is legally issued.
> while the Fed continues to do various things behind the scenes to make sure that the Treasury can plausibly claim that the debt is legally issued
What are you hinting at? The Fed doesn't decide on whether debt is legally issued. It also cannot overrule Treasury absent a court order. It's saying that, absent court advice, if the Treasury issues debt it will treat it like any other. There is nothing behind the scenes they need to do beyond announcing they'll treat them equivalently.
I'm just restating what was in the article, for example when it talks about "accounting gimmicks" that the Treasury uses to circumvent the debt ceiling. The Fed, as you say, cannot overrule Treasury, so if the Treasury tells the Fed to play a particular role in its accounting gimmicks (which it does), the Fed has no choice but to do so.
The treasury would auction off securities—probably short term bills—in excess of the debt ceiling. I am confident that this auction would succeed, in that dealers would be happy to bid, possibly at high yield. The settlement process following this auction has the Treasury and the dealers both sending out instructions on FedWire to transfer the bill to the dealer and the cash to the Treasury account.
The Fed’s conundrum is: do they possibly break the law, or do they certainly destroy the economy? I am supremely confident they will not destroy the economy. They’ve done gray-area actions to prevent economic catastrophe before. So the settlement will take place, Treasury will have cash, and everyone’s happy.
Then what? A lawsuit I presume, but who would sue the Treasury, and under legal theory? Not a lawyer, but I think you need to show injury to have standing to bring a case. But a case of this magnitude would be decided on political calculations as much as legal principles, and I cannot imagine the Supreme Court wants to be the party clearly responsible for world economic chaos.
And what kind of order could the Supreme Court issue? It would be weeks after the fact—maybe months. Some sort of unwind of the treasury auction, where the dealers put the bills back. (The bills might be expired though.) That would not solve a damn thing, because of the debt ceiling: there will be no money, and no way to raise any, to return to the dealers. I cannot overstate how damaging any such attempt to take back debt would be. This is similar to the collapse of a big bank or exchange, but orders of magnitude more so.
So since there really is not an effective legal remedy available to the court, why would they issue such an impossibility? I think the court will find a way to make the administration look bad, sure, but why would any court force a constitutional crisis? They are in a sense the weakest branch, especially in an emergency situation.
Ironically, I am 100% convinced that the Dobbs decision may be what finally returns the US government to sanity. Saying that abortion is a political decision that the states should decide for themselves and punting it back to the democracy is the right decision. Tonight abortion rights picked up in Ohio - which is something that politicians will have to factor in if they want to be elected - versus just railing against the evil of the other party having the votes in the supreme court, while using abortion as a eternal wedge issue.
I think this falls into the same category. Inventing laws out of whole cloth to paper over political division is bad.
There's an incredible book called "A free nation deep in debt: The financial roots of democracy"[1] which explores these sorts of questions from a historical perspective and shows the relationship between bond markets and governments.
What does this have to do with the Federal Reserve subverting the will of elected representatives? If we're talking about the 14th amendment, we're not talking about the Fed sua sponte-ing some action.
Literally someone is going to be 'too big to fail' and cause this to happen.
We all know how to catch this falling knife, the problem is that you basically uproot the Rule of Law to do it. After that you are going to have a disgruntled population angry that someone didn't have to play by the rules and we picked up the pieces.
We get some Band-Aid legislation that says 'this will never happen again'. Sometimes it does happen again.
> If savings incerease when the deficit increases, why don't we crank defecit so high that everyone can be billionaires?
Nominal wealth is relative. If everyone is a billionaire it doesn’t change the relative claims we all have on real resources.
What we can do however, and what MMT economists recommend, is using the power of the federal government as the issuer of the currency to ensure spending is maintained at full employment levels (meaning 0% involuntary unemployment). The best mechanism to achieve that is a federal job guarantee.
> And if the savings decreases when the deficit decreases the entire country must have been broke when we paid off our debt in 1835. Right?
Well sort of. Every budget surplus leads to a recession or depression[0]. However the US could retire all its “debt” overnight and stop issuing bonds and paying interest if it wanted to, without any surplus. The fancy terms for this are quantitative easing and overt monetary financing but fundamentally there is no difference between treasury issuing bonds “out of thin air” and issuing reserves “out of thin air”. Both reserves and government securities are high grade financial assets held by private banks, the nature of the liability held makes virtually no difference to the operation of the money system.
Bonds are simply used to set and defend the target cash rate which is also a pointless vestige, we should just have ZIRP forever[1].
Ignoring the weird philosophical overtones that come with any libertarian treatise on economics, the fundamental reason why we should eliminate involuntary unemployment is because it is the imposition of taxes to provision government which creates unemployment in the first place.
It doesn't really matter if workers in a job guarantee program are productive in the sense of being profitable, because involuntary unemployment has a negative (not neutral) impact on productivity at an individual and a societal level.
Ensuring spending is at full employment levels through a job guarantee maintains a buffer stock of employed and employable labour, ready for work in either the public or private sector, or at the very least prevents intergenerational poverty cycles from forming due to the negative impacts of involuntary unemployment.
If people want a job and are capable we should absolutely make sure they are working. That is not being challenged.
But what about all the people who we force to work who should not be working due to age or a disability? That's not "involuntary unemployment"; that's "involuntary employment"! We're using the coercion of homelessness and despair to force these people into roles where they are not suitable and then we pay a shift supervisor to hold their hand all day.
Well, if there are people who can't or shouldn't work at all, then I personally think they should just get the JG wage (this could extend to new parents, the aged, the infirmed, and so on).
However you might find that there are some aged, infirmed or disabled people who do want to work, and almost anyone can do something. It may be in their best interests, and in the best interests of society, to support their efforts.
When you remove a private sector profit motive your definition of "useful work" can expand quite a bit.
For the most part, though, involuntary unemployment consists of people who are willing and able to work, but who can't find employment in the private or permanent public sectors.
So basically they've been printing money and giving it to institutions who serviced reckless people who took on debts that they could not afford and did not repay. Guess who ended up paying for that? Every decent person who did the right thing; tax payers, salary earners (through devaluation of their salary contracts via inflation), those who did pay back their debts.
Then you wonder how all these reckless people ended up in positions of power.
If other people feel similarly, but are afraid to comment publicly, it can inspire discussion in future threads and create psychological comfort for them to join in the future.
Money IS debt. Government spending creates money and so does taking out loans. Those who live within their means or save large sums of money must thank those in debt for giving them the opportunity to do so. I say, better the government be in debt than private citizens because the government doesn't bounce checks.
> ... On that call, Powell and most of his colleagues reluctantly endorsed buying defaulted Treasury securities — an unprecedented move to maintain financial stability — if a legislative debt ceiling solution did not come in time.
This is a red herring. The Fed doesn't "buy" treasuries. It can't, at least not with dollars. The Fed conducts an asset swap in which it accepts a treasury, and credits the Fed account of the seller with bank reserves. These reserves are not spendable outside of the Federal Reserve system. No new money is created.
QE has done nothing to aid economic recovery - not here, not in Europe, and not in Japan, except to influence the psychology of people who don't understand what's going on.
If it ever comes to the Fed doing QE on defaulted treasuries, the same thing will happen. Big psychological boost for gullible investors, but nothing in terms of actual help to the economy.
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[ 3.1 ms ] story [ 187 ms ] threadHow would it play out if the Treasury decided to ignore the debt-ceiling outright, and continue to service the national debt? Imagine a policy that says, "In accordance with the Fourteenth Amendment, we will continue to pay bondholders their due monies" or something like that.
I don't think the 14th amendment gives the Treasury that power, but that's not what I'm asking. Imagine they decide to interpret it that way. The Supreme Court rules against them. They ignore the Court and continue to pay.
What happens then?
I guess what I'm getting at is: what is worse, a Constitutional Crisis? Or a default on our debt? To me it seems like the better outcome would be to ignore the Court altogether on this issue.
(I'm sure I'm making naive assumptions in this questions. Let me know!)
The Fed can't buy debt directly from the Treasury [1].
[1] https://www.federalreserve.gov/faqs/money_12851.htm
Also the Fed can just let Treasury run negative balances or any other number of accounting tricks.
So, Treasury decides to punch through the debt ceiling. What happens next?
That's true until it isn't. I hope you're right, but I worry that you're probably overestimating our politicians. They're not all playing 5D poker. Some are just plain stupid.
Our system of checks and balances didn’t really account for what happens when a sizable minority in government are bent in destroying it.
The debt ceiling debates every year are certainly theater though.
And it's not theater. When these debates occur the legislature is forcing the executive to face taking extraordinary steps. That's leverage used to negotiate budget deals.
Thus, the "extraordinary steps" I mentioned. Some have argued the executive has the authority to do any conceivable thing necessary to ensure that the "validity of the public debt ... shall not be questioned," to include ordering the Fed to honor Treasury overdrafts.
Another extraordinary step by the Treasury would be minting legal tender and depositing it with the Fed. The so called "trillion dollar coin" scheme.
At the end of the day they'll do what they have to do. This story makes it very clear that the Fed is not interested in becoming the political target over US default, so don't imagine they're going to take some heroic stand.
The Treasury hasn't come close to proposing over drafting. It would sell Treasuries and then have cash. If that became problematic, it would mint. The Fed cannot, by law, lend money to the Treasury. It can't even purchase Treasuries from them directly.
We'll see.
Others argue minting is more palatable. I think legally that's true. I think politically that's false: there is a visceral reaction to any talk of "printing." The various euphemistic ways the Fed can handle it will be preferred. Of course it will end up in front of SCOTUS, but that's a political win: SCOTUS becomes the bad gus trying to "destroy democracy". Or something.
The point is it’s unnecessary.
https://en.wikipedia.org/wiki/Trillion-dollar_coin
What does this mean? Even if a Treasury auction fails, the Treasury has the power to mint currency. It could literally just deposit paper representing the $200bn of gold at Fort Knox and have money in its Fed account.
Minting is more precedented than the Fed. Functionally doing this is trivial. It's legally asserting the supremacy of the 14th Amendment over the Public Debt Acts.
The US has defaulted on its debt several times.
For example FDR defaulted on the debt when he refused to pay back bonds denominated in gold with their face value and instead paid them back in devalued currency. The Supreme Court ruled that he had acted unconstitutionally, but also did not force the government to pay back the full value as FDR had said he would ignore such a ruling.
Now the ball is in the House's court. Are they going to vote to positively default? (Rather than passively not act before some deadline, like how they do it now?) I bet not.
But the treasury of course has many other ways of paying debts, including simply issuing currency. Even if the 14th amendment doesn’t invalidate the debt ceiling, the treasury still must pay the debts, and doesn’t have to do so by cutting spending. It would however be more orderly and strictly better for everyone if the 14th amendment did invalidate the debt ceiling in a situation that questioned the treasuries ability to make whole debts without resorting to disruptive measures.
It is strangely worded, but I think it could be interpreted to also mean that the government shall not do anything that would call the validity of the debt into question.
It doesn't really make sense to pass an amendment that tries to mandate the perception of the validity of the debt. if the government stops honoring it, then the invisible hand of the market will consider it invalid.
You could have "no one questioning the validity" but people are still going to either not participate in the auction, or bid only for high yields.
Do you arrest and imprison anyone who reveals that they are not getting paid on their bond at maturity? Do you force buyers to buy it at face value, even though they know it will not be honored?
See, that's why you aren't on the Court.
What the kind of people that actually get put on the Court would mostly due to allow the action without endorsing its legality would be:
(1) Be sticklers about standing and other threshold issues (ripeness, mootness, etc, but standing is the big and most useful one here); almost no litigant other than Congress acting as a whole will have the kind of particularized injury to allege that would give them standing to challenge paying the debt (an actual creditor might have standing the other way, but that's not the scenario we’re concerned with.)
(2) If you really can’t kick the case for standing or other threshold issues (well, first, amateur, but...) then invoke the “political question doctrine” to avoid it anyway.
But like, for other people who aren't so smart, thanks for detailing the mechanisms I would use :)
The House as a whole would probably have standing.
One stalemate averted by another!
If they wanted to raise hell they could simply make the worst decision and there’s nothing that can be done about it.
To be clear, that same gatekeeping can be and has a times been perverted into social exclusion, but the problem at hand IMO is the discarding of the baby with the bathwater.
The Supreme Court has been ignored before.
People who are aware of who Justice Thomas even IS would still be a vastly smaller circle than the number of people who would be affected and have very strong opinions on a US default (although not until it happens).
https://thehill.com/homenews/4019788-poll-thomas-has-highest...
Supreme Court Justice Clarence Thomas has been friends with Dallas billionaire Harlan Crow for 27 years. Crow said that he and his wife have been friends with Thomas and his wife Ginni since 1996.
Is there proof they were bribes as opposed to the innocent explanation that they are just family friends, and it's not unusual for billionaires to offer a free ride to their non-billionaire friends on vacation?
The answers are “you turn down gifts of far, far less, from much less-risky associates” and “not in the same multiverse, even”.
But after a binding ruling is issued, I'd assume there would be personal sanctions, liability and likely criminal charges against any individuals involved in defying that decision.
The president would almost certainly not want to take responsibility for the resulting economic implosion, and would order the executive to ignore the court ruling. Then it comes down to a mix of loyalties and individuals' beliefs around what would cause the least damage.
It's far more likely that a ruling like that would be the end of the court's power.
That's not accurate:
Power in the US government is of course separated between the legislative, executive, and judicial branches, and each has checks and balances on the other two.
One check the executive has on the judicial is to ignore its rulings. The executive can't do it all the time, obviously, and afaik the US also generally embraces 'judicial supremacy', the idea that the judicial branch generally gets the last word. Also, I don't recall the judiciary sanctioning indiviuals in the executive branch, but I could be wrong [Edit: of course I'm wrong, see below]. I would guess they've never sanctioned a president.
Perhaps the most famous use of this power was in Worcester v. Georgia; when his favored side lost the case, President Andrew Jackson reputedly said, "[Chief Justice] John Marshall has made his decision; now let him enforce it." (Inspiring rhetoric, but it led eventually to Native Americans having their land stolen and many being marched to their deaths.)
Every time someone in the executive has been held in contempt of court in relation to (but usually exceeding) their official duties, the judiciary sanctioned individuals in the executive branch.
That said, the President could pardon everyone involved.
So in the scenario you describe, the Treasury writes checks, and they bounce. That would be... bad.
The Treasury would have to collude with the Fed. Something like, the Treasury sells some bonds to the Fed, and the Fed buys them, putting the money into the Fed account. That's illegal, because Congress didn't authorize it, and they try to put the Treasury secretary in jail.
The Supreme Court says "We have no idea what's going on, this is up to you jackasses. Go legislate something." A whole bunch of stuff happens, but it all comes down to DC in flames and the country gives up.
The Treasury banks with commercial banks, but it also has an account at Fed. That said, banks aren't legally obligated to accept its cheques.
> an additional player, the Federal Reserve
That's what this memo describes [1]. In essence, the Fed says it will defer to the Treasury on whether debt is legally issued.
> Treasury sells some bonds to the Fed
The Fed can't do that [2]. What they can do is announce to the market that they won't treat post-ceiling debt differently from pre-ceiling debt. That's what this memo says.
It may not be able to continue doing that if e.g. SCOTUS rules Treasury exceeded its authority. But at that point, the Treasury could start testing its minting power.
In summary, the Fed isn't a player in the legal part of this game.
[1] https://www.federalreserve.gov/monetarypolicy/files/FOMC2011...
[2] https://www.federalreserve.gov/faqs/money_12851.htm
I kept thinking about the Fed doing maneuvers as "one possible path", and the Treasury doing maneuvers as "another path", but they're kinda the same.
Thanks.
Why write a check?
https://en.m.wikipedia.org/wiki/Trillion-dollar_coin
As the article notes, the Treasury already does things to circumvent the debt ceiling, and nobody cares. The article is just discussing further things that the Fed could do to help the Treasury circumvent the debt ceiling if necessary.
In other words, I don't think the debt ceiling issue will ever trigger a Constitutional crisis. (Unless, of course, you think, not unreasonably, that all this circumventing of laws passed by Congress already is such a crisis, but that's a whole other discussion.)
Not even that. The Fed is saying they'll defer to the Treasury on whether debt is legally issued. (Presumably, until SCOTUS rules on it.)
Yes, while the Fed continues to do various things behind the scenes to make sure that the Treasury can plausibly claim that the debt is legally issued.
What are you hinting at? The Fed doesn't decide on whether debt is legally issued. It also cannot overrule Treasury absent a court order. It's saying that, absent court advice, if the Treasury issues debt it will treat it like any other. There is nothing behind the scenes they need to do beyond announcing they'll treat them equivalently.
I'm just restating what was in the article, for example when it talks about "accounting gimmicks" that the Treasury uses to circumvent the debt ceiling. The Fed, as you say, cannot overrule Treasury, so if the Treasury tells the Fed to play a particular role in its accounting gimmicks (which it does), the Fed has no choice but to do so.
The Fed’s conundrum is: do they possibly break the law, or do they certainly destroy the economy? I am supremely confident they will not destroy the economy. They’ve done gray-area actions to prevent economic catastrophe before. So the settlement will take place, Treasury will have cash, and everyone’s happy.
Then what? A lawsuit I presume, but who would sue the Treasury, and under legal theory? Not a lawyer, but I think you need to show injury to have standing to bring a case. But a case of this magnitude would be decided on political calculations as much as legal principles, and I cannot imagine the Supreme Court wants to be the party clearly responsible for world economic chaos.
And what kind of order could the Supreme Court issue? It would be weeks after the fact—maybe months. Some sort of unwind of the treasury auction, where the dealers put the bills back. (The bills might be expired though.) That would not solve a damn thing, because of the debt ceiling: there will be no money, and no way to raise any, to return to the dealers. I cannot overstate how damaging any such attempt to take back debt would be. This is similar to the collapse of a big bank or exchange, but orders of magnitude more so.
So since there really is not an effective legal remedy available to the court, why would they issue such an impossibility? I think the court will find a way to make the administration look bad, sure, but why would any court force a constitutional crisis? They are in a sense the weakest branch, especially in an emergency situation.
I think this falls into the same category. Inventing laws out of whole cloth to paper over political division is bad.
[1] https://www.james-macdonald.net/free-nation-deep-in-debt
The Constitution is a democratically-formed device, and the Constitution contains the 14th Amendment.
It isn't. The Federal Reserve Act, passed by Congress and signed by the President in 1913, allows the Fed to do all the things it does.
But this has no bearing on the debate around who has sovereignty over deciding things.
"That's bad, and the Fed intervening is therefore good" does not dispute its anti-democratic nature.
We all know how to catch this falling knife, the problem is that you basically uproot the Rule of Law to do it. After that you are going to have a disgruntled population angry that someone didn't have to play by the rules and we picked up the pieces.
We get some Band-Aid legislation that says 'this will never happen again'. Sometimes it does happen again.
https://moslereconomics.com/mandatory-readings/innocent-frau...
If savings incerease when the deficit increases, why don't we crank defecit so high that everyone can be billionaires?
And if the savings decreases when the deficit decreases the entire country must have been broke when we paid off our debt in 1835. Right?
Nominal wealth is relative. If everyone is a billionaire it doesn’t change the relative claims we all have on real resources.
What we can do however, and what MMT economists recommend, is using the power of the federal government as the issuer of the currency to ensure spending is maintained at full employment levels (meaning 0% involuntary unemployment). The best mechanism to achieve that is a federal job guarantee.
> And if the savings decreases when the deficit decreases the entire country must have been broke when we paid off our debt in 1835. Right?
Well sort of. Every budget surplus leads to a recession or depression[0]. However the US could retire all its “debt” overnight and stop issuing bonds and paying interest if it wanted to, without any surplus. The fancy terms for this are quantitative easing and overt monetary financing but fundamentally there is no difference between treasury issuing bonds “out of thin air” and issuing reserves “out of thin air”. Both reserves and government securities are high grade financial assets held by private banks, the nature of the liability held makes virtually no difference to the operation of the money system.
Bonds are simply used to set and defend the target cash rate which is also a pointless vestige, we should just have ZIRP forever[1].
[0] https://www.levyinstitute.org/pubs/pn99_3.pdf
[1] https://neweconomicperspectives.org/2014/07/debt-free-money-...
This is the MMT fallacy. Full employment != full production.
If you want your economy to be as efficient and productive as possible, the mandate cannot be "full employment".
This means inefficient workers must be paid to not work.
https://fee.org/resources/economics-in-one-lesson/#calibre_l...
It doesn't really matter if workers in a job guarantee program are productive in the sense of being profitable, because involuntary unemployment has a negative (not neutral) impact on productivity at an individual and a societal level.
Ensuring spending is at full employment levels through a job guarantee maintains a buffer stock of employed and employable labour, ready for work in either the public or private sector, or at the very least prevents intergenerational poverty cycles from forming due to the negative impacts of involuntary unemployment.
But what about all the people who we force to work who should not be working due to age or a disability? That's not "involuntary unemployment"; that's "involuntary employment"! We're using the coercion of homelessness and despair to force these people into roles where they are not suitable and then we pay a shift supervisor to hold their hand all day.
However you might find that there are some aged, infirmed or disabled people who do want to work, and almost anyone can do something. It may be in their best interests, and in the best interests of society, to support their efforts.
When you remove a private sector profit motive your definition of "useful work" can expand quite a bit.
For the most part, though, involuntary unemployment consists of people who are willing and able to work, but who can't find employment in the private or permanent public sectors.
Then you wonder how all these reckless people ended up in positions of power.
Who is "they"? The Treasury?
This is a red herring. The Fed doesn't "buy" treasuries. It can't, at least not with dollars. The Fed conducts an asset swap in which it accepts a treasury, and credits the Fed account of the seller with bank reserves. These reserves are not spendable outside of the Federal Reserve system. No new money is created.
QE has done nothing to aid economic recovery - not here, not in Europe, and not in Japan, except to influence the psychology of people who don't understand what's going on.
If it ever comes to the Fed doing QE on defaulted treasuries, the same thing will happen. Big psychological boost for gullible investors, but nothing in terms of actual help to the economy.
Of course it does.
https://www.federalreserve.gov/faqs/how-does-the-federal-res...
"The Federal Reserve purchases Treasury securities held by the public through a competitive bidding process."