Posted by: maroonmaurader | July 30, 2011

Two debt-ceiling-related ponderables

One of the nice things about the debt ceiling is that I’m decidedly not qualified to comment knowledgeably on almost anything related to it… which means I’m free to tilt at windmills, so to speak.

First – as you’ve probably read, some people (including Bill Clinton) have been pushing for President Obama to declare that the 14th Amendment, specifically the part reading “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,” gives him the authority to simply ignore the debt ceiling and keep up payments. It’d be an open question whether the 14th Amendment actually does give that authority (does every payment Congress authorizes become a “debt”? That seems a little silly. But even if you only constrain it to things that are clearly debts – pensions, interest payments, and payments for completed contract work – it still is higher than the revenue brought in by taxes, so it still means that the debt will have to continue to rise to keep up those payments). However, and this is the interesting point… suppose that Congress does not raise the debt ceiling, and President Obama does not use the 14th Amendment as justification to continue payments. In that case, the Treasury has to stop paying some people to whom it owes a debt (because it simply won’t have enough money)… so potentially, that could give those people legal standing. One wonders what a judge would do if faced with, say, a military contractor suing the federal government to resume payments on a recognized contract.

Second – there has been a lot of talk about the consequences of the US losing it’s credit rating. Generally I believe the discussion goes something like this: The US would have to pay higher interest on bonds in order to continue to attract investors, so interest payments going forward would be higher. Further, the fact that US bonds pay higher interest would mean that other lenders would also charge higher interest on loans, driving up the prices of all consumer borrowing (e.g., mortgages). However… if a bond is safer than US bonds, you would expect a lower interest rate. If it’s less safe than US bonds, you would expect a higher rate. Historically US bonds have been considered pretty much the definition of “safe” bonds; the Treasury has raised and lowered interest rates not to draw in the necessary revenue, but rather as a way of manipulating the market. It isn’t surprising that, with the US making decisions like that (paying more than it needs to, while being the biggest single borrower in the market), it has had it’s rate-setting effect on the market (i.e., they might offer 2% interest at a time they only need to offer 1% interest, simply because they want interest rates to go up generally). However, if the US starts paying more interest not because it can, but because it has to because US bonds aren’t seen as safe any more, I would expect at least some decoupling in the historic relation between federal bond rates and overall interest rates.



  1. […] couple of posts back, MM raised the interesting question whether a court could order the United States to pay damages to a […]

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