Default not an option under U.S. Constitution

June 28, 2011

By Reynolds Holding
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

A federal default is no option under the U.S. Constitution. Rating-agency warnings and budget-talk walkouts aside, America’s founding document probably won’t let the government stiff its creditors. That’s no reason to derail a deal on the debt ceiling. But if push comes to shove, the White House may have the greater legal leverage.

Politics drive the conceit that the debt cap is inviolate. So long as it isn’t breached, the Treasury Department, rather than Congress, can keep the power to issue debt. That’s why the Obama administration predicts economic “catastrophe” if the ceiling isn’t raised. Republicans, on the other hand, can hold an increase hostage to deep cuts in spending, healthcare and retirement obligations.

But a mere statute created the ceiling. The Constitution trumps statutes. And a clause in the Fourteenth Amendment essentially says that the feds cannot renege on debts, meaning the cap could, if it came down to a court decision, be declared unconstitutional.

There’s some doubt, because the clause has rarely been tested. It was enacted in 1868 to ensure payment of Civil War obligations, but the Supreme Court has twice confirmed that it also covers current debts backed by the United States. Government bonds qualify, and Social Security may as well, because the clause includes “debts incurred for payment of pensions.”

The language is so sweeping — public debt “shall not be questioned” — it seems to require on-time payment in full. That could be a problem if money trouble forces the Treasury Secretary to choose which obligations to cover first. During a spat over the cap in 1985, the Government Accountability Office said prioritizing payments would be OK, but it didn’t mention the Constitution.

It’s hard to believe the debt clause will come into play. Congress has raised the ceiling 10 times since 2001. But if Congress insists on forcing Uncle Sam into acting like a deadbeat, the president has a clear — if unprecedented — response. He can declare default unconstitutional and arrange to pay the nation’s debts unilaterally. That would certainly demonstrate that the United States is a better credit risk than anyone thought.

Comments

The question is not about defaulting on debt. It is about cutting spending.

Posted by BrainsHere | Report as abusive
 

Time to prove to the rethugs that we do not have to cave to their hostage demands.

Posted by nitridr | Report as abusive
 

“It is my occupation to be plain.”
Amend.14
Section 4. “debts for service in suppressing insurrection or rebellion, shall not be questioned.”
Where is the rebellion or insurrection which would activate this clause?

Posted by honest_kent | Report as abusive
 

Meh. The brinksmanship is about politics, that’s all there is to it. Republicans talk big on cutting spending and then bury us in two wars. There’s going to be no agreement without increased taxes, and the Republicans are just trying to strongarm their way and stop anything that smacks of giving in to Obama.
NO Republican would dare be thought of as the person who cost the nation hundreds of billions of dollars by making us lose our guarantee of payment. Total brinksmanship, except there’s no brink.

Posted by REDruin | Report as abusive
 

LOL–since when does this president and this congress give a damn about the Constitution?

Posted by cautious123 | Report as abusive
 

Not that cutting spending isn’t also an important issue, but this is first and foremost about not defaulting on obligations already on the books. You can cut all you want, but that takes more time to take effect than we have unless you’ld rather shut down the government and divert other payments like social security, medicare, payments to states, etc… to make payments to bond holders and other creditors. There’s no cutting spending only way to make immediate payments without borrowing and/or raising some revenue. And, pushing out any payments is still a default even if you pay the next month or so and will have disasterous consequences.

If the GOP keeps refusing to even budge an inch, don’t be surprised if people panic and start pulling massive amounts out of the stock market and banks and drive us into a depression in those last couple of days leading up to the deadline. This is not a time to play chicken just for the sake of politics.

Posted by mikemm | Report as abusive
 

Agree with above poster. Not raising the spending ceiling is not the same as defaulting on our debts. It just means that the administration will be forced to make cuts in spending to have enough money to pay our debts, the debt payments taking priority to spending programs. Everyone would love to keep our current levels of benefits, but WE ARE OUT OF MONEY!

Posted by zotdoc | Report as abusive
 

Unfortunately the question is neither about defaulting on the debt nor cutting spending, it’s about Republicans effort to delegitimize and defeat President Obama.

Posted by dpgumby | Report as abusive
 

@BrainsHere, no it is not about cutting spending, it about the GOP holding the full faith and credit of the USA hostage to preserve tax breaks for the ultra rich. The dems have already agreed to over 2 TRILLION in spedning cuts, while the GOP is balking at only 600 BILLION in revenue increases due to elimination of breaks like the private jet deduction.

Saying something over and over again does not make it true to you FOX news viewers on the right.

Posted by USAPragmatist | Report as abusive
 

Sorry to disagree, but it IS about defaulting on debt which we have legally incurred and owe. Cutting spending is an internal problem which we need to deal with ourselves, without involving our creditors. First, we need to keep paying our bills. These are two separate issues entirely.

Posted by Gordon2352 | Report as abusive
 

“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. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.”

– Section 4 of the 14th Amendment to the United States Constitution

It seems to me that we could decide not to legislate any more debt, but we would still have to pay any debt that has been established by law. That means any Social Security, Medicare, Medicaid, and any Federal pensions have to be paid by the U.S. Treasury without any questions asked.

Posted by dnno1 | Report as abusive
 

So default is not an option under the Constitution? True enough.

But I see the Constitution also stipulates that, “Money shall be gold and silver.”

Gold and silver. Not paper dollars. Intentionally, deliberately, the founders of our nation chose to base its economy not paper dollars created from a printing press, but rare commodities that could not be reproduced at will, to be spent at will.

Gold and silver are relics, you say?

If we had stuck to valuing our currency against them, as the Constitution REQUIRES, we would have no deficit today, and no threat of default. No dependency on China and other nations to prop us up by buying bonds. We would have been forced to live within our means, which is exactly what the founders intended.

They knew all about the human tendency to lose control if a power — the ability to print money at will, for example — is not checked by a counterbalance. Gold and silver were the intended heck and balance for the currency, just as the executive, legislative, and judiciary branches were intended to check and balance each other. And so they do.

But we have violated the Constitution by letting the dollar be printed unchecked, and the madness that followed will undo us. Unless we undo it.

Posted by NewsLady | Report as abusive
 

An important point missed in this whole discussion is that even talk of reducing the US credit rating is enough for holders of US debt to run for cover – NOW. The head of PIMCO, the largest hedge fund, stated publicly that they are already selling US Treasuries as fast as possible AND he believes so are other big holders of US debt. Even the hint of default represents higher risk and lowered willingness to support US debt.

We don’t have to wait until August 2nd, since the default for all practical purposes has already started.

This irresponsible wrangling is already causing an enormous amount of damage and has reduced the credibility of the United States. Basically, they are shunning their responsibility under the Constitution to support the general welfare (not the one percent).

Posted by ptiffany | Report as abusive
 

>>”But I see the Constitution also stipulates that, “Money shall be gold and silver.”

Gold and silver. Not paper dollars. Intentionally, deliberately, the founders of our nation chose to base its economy not paper dollars created from a printing press, but rare commodities that could not be reproduced at will, to be spent at will.

Posted by dnno1 | Report as abusive
 

@zotdoc. Dude you are totally confused! When you have EXISTING debts to be repaid, cutting spending DOES NOT give you the money to repay the existing debts UNLESS you cut ANNUAL spending BELOW revenues immediately. This means the ANNUAL budget deficit must be immediately and forever turned into a budget surplus.

Given the current economic conditions, such a cut is current annual spending (over 1.4 Trillion in annual spending would need to be cut) will cause a massive and immediate depression from which we will likely never recover.

We need a LONG TERM plan to reign in spending. Not a knee-jerk kamikatze plan. In the SHORT TERM, we have to set the stage for economic GROWTH.

Frankly, this whole ploy about tying the debt-ceiling to budget cuts is a SHAM. The Congress APPROVED the deficit spending which increased the debt on the one hand, does it make sense that they should now say that they won’t APPROVE the increase in debt that was cause by the APPROVED spending on the other hand.

You would have to be a moron to buy these antics from Congress which are already putting the credit ratings of the US in danger. Or perhaps people don’t have a clue when it comes to simple math.

Keep this up and there will be serious bond market implications WELL BEFORE August 2nd.

Posted by Mangojulie | Report as abusive
 

There appear to be more than a few individuals who believe that a government shutdown and hitting the debt ceiling are the same circumstance-however, there IS a difference. In the case of a government shutdown, Congress has not appropriated funds for any number of services, with the exception of Social Security. Social Security has permanent appropriation-even during a shutdown, those payments would be made. Hitting the debt ceiling is another circumstance altogether-in that instance, Congress HAS appropriated the funds, but the Treasury no longer has the ability to borrow the money to pay for the services that have been contracted. Putting things into proper perspective is imperative to the resolution of any problem. People seem to be struggling with this concept as is evidenced by the recurring subject matter and the tone of far too many of these comments. For example, I’ve heard more than enough about the revenue to be realized through the elimination of tax breaks currently enjoyed by America’s wealthiest. This will purportedly result in revenue which has been estimated by various sources to be around $290 billion over 10 years. The reality is that these “tax breaks”-which purportedly target only America’s “millionaires and billionaires”- consist of eliminating the ability of people making more than $200,000 ($250,000 for couples) to itemize their deductions. Know any millionaires or billionaires whose annual haul is in the $200,000 to $250,000 range? Me neither. Bottom line-we can’t afford to be placated with rhetorical solutions when the problems our nation faces are substantial, and the consequences of inaction are both catastrophic and imminent. We need to pay attention to the specifics of proposed solutions instead of allowing ourselves to be caught up in the diversionary tactics of those who stand to lose the most.

Posted by slim56 | Report as abusive
 

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