What happens on August 3?

By Felix Salmon
July 7, 2011
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Samuel Beckett’s famous phrase “You must go on, I can’t go on, I’ll go on” is a pretty good summation of what will face Treasury come August 3 if there’s no deal on the debt limit. Reuters has a fantastic story this evening on the impossible quandary facing Treasury officials should the unthinkable come to pass; purely as a practical matter, it’s far from clear that it’s even possible to stop making the 3 million payments that Treasury makes automatically every day. Doing so involves a massive computer-reprogramming effort which I’m sure could not be implemented overnight — and for political reasons nobody is going to get started on such an effort until after all hope is lost for a deal in Congress.

Realistically, then, the government is likely to breach the current debt ceiling no matter what Congress agrees. A failure to lift it would be a bit like an edict to a steaming supertanker that it had to stop dead: no matter how much force of law that edict has, sheer momentum is going force many basic operations of the public fisc to continue for some period of days or weeks.

At that point — and no earlier — there would be enormous pressure on the White House to pull out the 14th Amendment and declare the debt ceiling unconstitutional, if only for practical reasons: doing so would be a lot easier than trying to reprogram the computers which are set to send out $49 billion of Social Security checks on August 3. Not to mention that no president ever wants to be the person who stiffed America’s seniors on their guaranteed monthly income: a greater failure of leadership can hardly be imagined. On the other hand, saying “enough of you bickering legislators, I’m sworn to uphold the Constitution and do what’s in the best interest of the country” is much more presidential.

That said, it’s easy to see why the official Treasury position is about as hardline as it gets:

“Our plan is for Congress to pass the debt limit,” Geithner said late in May. “Our fall-back plan is for Congress to pass the debt limit, and our fall-back plan to the fall-back plan is for Congress to pass the debt limit.”

The August 2 deadline is real, and no responsible legislator would risk letting it pass. Beyond that date is uncharted territory: Here Be Dragons stuff. Real uncertainty, as opposed to risk: anything could happen, including some extremely catastrophic outcomes related to payment default on maturing Treasury securities.

For the time being, the markets are buying it. The latest Treasury auction of four-week bills came in at 0.000% — Treasury is getting the money, literally, for free. And the maturity? August 4 — two days after the August 2 deadline. It’s entirely possible that Treasury simply won’t have the money to repay this principal. And yet that possibility clearly isn’t priced in — partly because it can’t be priced in, and partly because of auction dynamics: the bidders who won the auction are precisely the people who aren’t worried about the debt ceiling.

According to the Reuters report, a “small team of Treasury officials” is trying to work out what might happen come August 3 — can payments be delayed? Can the Constitution be invoked? Can the government prioritize payments? (It seems to me that if the debt ceiling is real, it would have to, it wouldn’t have any choice.)

The really depressing thing is that even if a deal does get done this month, the planning won’t have been in vain. Now that the Republicans can see how much leverage the debt ceiling gives them, they’re going to pull this stunt every time it gets near. The best-case scenario, with a big $2 trillion increase, would mean that we’re going to go through the exact same thing late in 2012; a more modest increase in the debt limit would set up a reprise of the current fiasco much sooner.

And that’s the invidious thing about low-probability events. Repeat the experiment often enough, and eventually they’ll happen. We’ll get a deal done this time. But one day, we won’t. And that day is not going to be a happy one.

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Comments
19 comments so far

“No responsible legislator would risk letting it pass.”

“Now that the Republicans can see how much leverage the debt ceiling gives them, they’re going to pull this stunt every time it gets near.”

I think it’s worth paraphrasing: Republicans are irresponsible.

Posted by GRRR | Report as abusive

Agree with everything you said, which is why it would make sense for Obama to invoke the 14th Amendment. Doing so would guarantee this dangerous game is never played again.
I’m not sure he’ll do it, though. He tends toward gutlessness. But he may prefer the drama as it is playing out, so he can take credit for the budget cuts and for ‘saving the country.’ Also, he tends to lead only as a last resort (viz. health-care reform, extending Bush tax cuts.)

Posted by RZ0 | Report as abusive

I still don’t think Obama has adequately explained/atoned for his no vote on raising the debt ceiling as a Senator. Until he does, this remains very much a case of “do as I say, not as I do.”

Posted by Curmudgeon | Report as abusive

Re Obama voting against raising the debt ceiling in the past:

I’m sure it was for political purposes on his part, although you can justify the distinction by the fact that 2011 is a much different landscape than 2006 – the economy was (theoretically) working back then. Now, not so much.

Posted by djiddish98 | Report as abusive

Agree with everything you said, which is why it would make sense for Obama to invoke the 14th Amendment. Doing so would guarantee this dangerous game is never played again. Magazine printing

Posted by dilbikk | Report as abusive

To repeat, again, it is very, very clear that the 14th amendment has nothing to do with Obama’s authority, without the consent of Congress, to issue debt on his own, only on whether debt will be honored. I don’t understand this collective inability to read.

The question, then, if Treasury can’t issue debt but also can’t, logistically, stop sending out checks, is what happens if the US overdraws its account? Do checks from the Treasury bounce? If they just go through, perhaps the debt ceiling is, as a practical matter, meaningless.

Posted by dWj | Report as abusive

It’s not at all clear. If any of the debt is under question, all of it is under question. S&P is not going to say “this teeny bit here is now junk, but the rest is AAA”. And Congress has already given consent to spend the money. The Executive is just carrying out the spending orders of Congress. I don’t understand your unwillingness to think things through.

The President should just keep doing his job, minus the strange caving on Social Security, and if things aren’t resolved by the deadline, declare that the 14th amendment doesn’t allow him to let the debt come into question, so he’s instructing the Treasury to carry on as normal until Congress passes a debt limit increase.

Posted by KJMClark | Report as abusive

The 14th amendment idea is the most practical way around the debt ceiling, but it’s plain in the constitution that the President does not have authority to issue debt. Only Congress, with a presidential veto, has that authority. The debt ceiling is only there so they don’t have to approve every single bond issue.

One could argue that the 14th amendment is later than Article I and thus its expansive language overrules the list of powers granted to Congress. Again, from a practical perspective, that would work out best. However, from a purely legal perspective, it wouldn’t hold up that a vaguely written clause would give the Executive branch the power to issue debt.

The 14th amendment, however, does overrule any possible statutes. The job of the Executive branch is to enforce the constitution and then the statutes. Rather than breaking Article I to enforce the 14th amendment, the president would break the Social Security statute, Medicare statute, laws setting soldier pay, etc. by cutting all non-debt expenditures in half with IOU’s for the rest of it.

Then again, the best legal reasoning does not really matter in the Supreme Court. If the most straight-forward legal reasoning creates something horribly impractical and wrong, the courts tend to bend over backwards to legally justify the more practical course. By the letter of the law, a court probably should issue an injunction for any debt issuance not approved by Congress and then rule against it. In the real world though, I would guess no court would issue an injunction and cause the US to default. I would also guess a court would interpret the 14th amendment as implicitly overriding the Article I power of Congress to issue debt, since that power gives Congress the authority to spend and then not fund the spending with debt, calling into question all US obligations.

Posted by mwwaters | Report as abusive

While we clearly have the lowerhand in the current mess… my fellow republicans don’t have a tradmark or patent on stupidity. I can see a dozen scenerios where the democrats refuse to lift the debt ceiling just so Mitt Romney can extend tax cuts for the wealthy.

I could even doveish democrats using the debt ceiling to force an end (or at least a descalation) to what seems like perpetual war. It’s been 10 years now… it took 4 to beat two global powers with industrial economies each 70 million strong in WWII. We still have 150,000 fighting men and women deployed in combat zones two months after Osama became fish food… when’s the ticker tape parade that means the boys can come home and the TSA disolved. Reinforce and lock the cockpit doors hell yes… spend 8 billion/year to side scatter radar / grope every man woman and child taking a flight… hell no!

Posted by y2kurtus | Report as abusive

1. Issuing new debt to pay the principal on debt mauring on August 4 does not increase the total debt. Therefore, this is not a problem caused by failing to increase the debt limit.
2. Bills can be paid in the short term by “creating money.” Money was most recently created in the Quantitative Easings 1 and 2. Congress was not involved in these actions. This is a short term solution only, because creating money diminishes the value of our currency.
3. If congress fails to raise the debt ceiling, defaulting on the debt is a CHOICE that the president makes. There is enough revenue to continue paying on the debt. If he chooses to fund the ever-increasing federal programs rather than paying on the debt, that would be irresponsible, but it is his decision.

Posted by SMike | Report as abusive

Pres. Clnton + Rep. Congress = budget surplus & strong economy
Pres. Bush + Rep. Congress + 9/11 = 2 new wars ->> Increased spending and budget deficit
Pres. Bush + Dem. Congress = dramatic increase spending and amplification of budget deficit
Policy authored by Dems & Repubs to give home loans to people not able to afford + wall street speculation on hi risk home loans = bad recession
Pres. Obama + Dem. Congress = sky’s the limit spending because $$ grow on trees
Pres. Obama + Dem Congress = NO Congressional budget > 2 YEARS

Sorry to remind those above regarding debate of 14th Amendment – I think you’re willingly ignoring the bigger picture.

This President and a Dem Congress has no intention of repaying the $$$ borrowed. The 14th Amendment has only become an issue after a new crop of Repubs were elected who, though mixed in with the old, do not share the ‘spend like crazy’ mentality.

Of course you need to increase revenue in addition to reducing spending. However, this President and Dem leaders aren’t helping either. No tax increase is uncompromising – agreed… But frankly, as a taxpayer, it would be a confidence builder to me to know that the fed gov’t, and secondarily state gov’ts following, can reverse their spending carelessness & spend wisely.

None of the above commenters would keep giving $$$ to someone who just spends it, only coming back once yearly to ask for more…

Current Dem leadership have been even MORE irresponsible by not passing a budget x 2 years, then saying $hit like “Entitlements are off the table.”

- Cut Pentagon spending? Sure! Cut it 10%.
- Lets also eliminate ALL tax loopholes for big businesses – which donate to both political parties – but drop the corporate tax rate so they still have incentive to create jobs.
- Allow US companies the freedom with less regulation to develop natural gas resources here in the US – another industry to increase income, increase new jobs, increase tax revenues, and increase revenues from exports while decreasing dependence on foreign oil. Both ND & TX are doing fairly well b/c of this. (Hypocritical to say, ‘No drilling.’ here in the US, butgivint $2 billion to Petrobas, then telling Brazil we want to be their biggest importer…)
- Let’s eliminate gov’t grant funding for things that private non-profit organizations can raise $$$ for – essentially everything – except the NIH, CDC, & NSF.
- Allow individual states to target their individual needs more specifically at the state level. Why should someone’s taxes from any state be used to help prop up other states going broke?
- pass laws making lobbying illegal for EVERYONE
- aggressively investigate & prosecute ANY politician who commits fraudulent or corrupt actions resulting in their personal financial benefit or evades taxes
- eliminating all earmarks… if an individual state wants a project that will only have local impact or benefit, let that be a state funding matter, nit a federal funding matter
- term limits of 2 for Senate, or 6 for House (total 12 years)
- eliminate tax deductions for ANY donation to ANY political organization

- And yes, combine Medicaid & Medicare while cutting their budget by 10% to eliminate redundancy & waste.
- And yes, prosecute Medicaid & Medicare fraud & loss.
- And yes, consider repealing Obamacare – no 2000pg bill should ever be passed without substantial open debate… from either party.
- And yes, reduce Social Security funding by 10%, & making the following ineligible for SS:
– anyone < 67 unless proven handicapped (MDs providing fraudulent documentation prosecuted);
- anyone >= 67yo w/ indiv total assets >= $750 thousand or combined pr >= $1 million;
– this can be amplified for those truly in need by eliminating the death/inheritance tax
– any person convicted of a felony after the age of 50
- this isn’t even yet approaching consolidating many federal agencies which serve redundant functions providing social services
- no social benefits whatsoever for people residing illegally in this country, and immediate loss of social benefits (& repayment if collection had started) for those who hire & exploit those here illegally

The above is just a start…

When the Federal Government demonstrates it can rein in it’s spending, then I would have more confidence & less problems that when my taxes are raised, that the funds would be used wisely, not to benefit some corrupt politicians’ cronies…

So you can debate the 14 th Amendment & point fingers, but the sad fact is that you are doing no different that arguing with a credit card bank/ company to raise your spending limit while you make minimum payment, or threaten to walk away from paying. The question shouldn’t be, “How much should we raise the debt ceiling?” The question should be, after stopping & thinking, “Should we raise the debt ceiling? Perhaps it is a necessity, but shouldn’t be done so frivolously, should be done with embarrassment, and should be done with A LOT of CUTS in spending now…

Moody’s, Pimco, S&P haven’t yet downgraded the US Federal Credit status, but I already have. I get the sense that I am in no means by myself.

Point fingers at whoever you want. It’s moot – this country is in serious trouble financially. If all of you are okay with the fact that we are here now because of politicians of ANY stripe has been making promises they cannot keep, at someone else’s expense, then look in the mirror andvstart bitching at yourselves…. Nothing says you can’t donate more of your hard earned $$$ on the bottom line of your Federal or State tax returns… But I suspect that most of you don’t.

Posted by FUMFKR | Report as abusive

What a joke. What’s really irresponsible is pretending that our ever increasing debt has no consequences. Is the worst thing to say on August 2nd that some payments will have to be delayed until the politicians on both sides can come to an agreement. Or is the worst thing to say its business as usual and we’re going to go ahead and keep up the borrowing without much change to our long term trajectory? As long as the debt increases the way it has been over the last decade, the Republicans AND the Democrats would be delinquent in their duties to their country not to examine the debt everytime it needs to be increased.

Posted by hostdude99 | Report as abusive

Could you also argue that when Congress passed $X of spending, but only $Y of taxes, they implicitly agreed to borrow X – Y dollars? So they did give their constitutionally required approval to borrow those dollars? This makes great sense to me.

Posted by RichardHSerlin | Report as abusive

Some of you got it wrong.
There are several way the president can act. Two under the 14 amendment, other two under an emergency powers or law.

On the 14th amendment. They key words I am focusing on is “If congress fails to act”

1st way Congress
Congress fails to act by August 1st 11:59 p.m ET, then the President has the authority to raise the debit ceiling under the 14th amendment. He or any President would have to do it or could get impeached for not doing it. From me reading full 14 Amendment, he or another other president would have no choice to do this.

2nd way
This is a little more sticky. He could veto the bill & use the 14th amendment

3rd way
Is temporarily declare an national emergency & using emergency powers to raise the debit ceiling.

4th way
He could raise the debit ceiling under National Security laws.

As to the other comment.

People have to pay their bills, I am sure telling you credit card company, landlord or your mortgage company you social security or will not come this month will be fine with them. Which mean more people will be out on the street. Do you really want you grandfather, grandmother on the street?

He or any president would have to do some type of emergency action even if it maybe illegal. That for the courts to decide.

Posted by gpatrick850 | Report as abusive

Take a deep breath and repeat after me, the President does not have the authority to use the 14th amendment to increase the debt ceiling. What it says is that the debt must be paid.

It may also come as a shocker but Leviathan has enough money coming in to pay it’s debts “authorized by law”.

There’s plenty of other things that will just have to go unfunded. Obamacare would be a good start.

Posted by realchrisw | Report as abusive

The relevant part of the 14th amendment says: “The validity of the public debt of the United States, authorized by law… shall not be questioned.” Wonder why nobody else seems to have posted that yet.

Looks to me like the President raising the debt limit would be blatantly unconstitutional. It says the validity of public dept authorized by law, and only Congress has the authority to authorize public debt. Any president trying a stunt like that ought to be impeached, not that it seems to have stopped anyone before.

FWIW, tax hikes may be necessary to get us completely out of this mess, but I want to see big spending cuts before we even think about it.

Posted by ufmace | Report as abusive

The 14th Amendment does not authorize new debt. Social Security payments are not legal debt; they are political/moral debt. Congress can change SS any time they want to. The federal government gets about $190 Billion each month. Interest on the debt is about $30 Billion each month. That leaves $160 Billion for various programs. Congress will have to start picking and choosing which programs to save and which to throw under the bus. They don’t want to. Congress needs to grow up.

Posted by DavidAi | Report as abusive

So it’s irresponsible to live within your means? Hardly. It’s irresponsible to tell the people that we can continue to spend at a breakneck pace and never have to pay the bill. The radicals, the extremists here, are the Democrats.

Posted by JWnTX | Report as abusive

Oh, and guess what? The Dems have raised the debt ceiling SIX times without raising taxes. But now it’s essential? BS. They’re milking this for nothing but political gain and trying to set up the Republicans as the bad guys because they’re proposing fiscal responsibility in government.

Posted by JWnTX | Report as abusive
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