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broccoli                                                        Image by Carl Rose

We came very close to a moment when the definition of the word “default” would become very important – and we may come to that moment again, perhaps within a matter of weeks.  My definition:  Default is what the financial markets say it is.  Personally, I hope that the financial markets never need to make that definition specific.

Some background – that is, how the Treasury markets work:

The Treasury sells securities of varying maturities.  The shortest-term securities, called bills, have maturities generally of four weeks, 13 weeks, 26 weeks, and 52 weeks.  (Treasury sometimes sells even-shorter-term securities, called “cash-management” bills, to deal with minor unforeseen financing needs.)  Bills are like “zero-coupon” securities – that is, they are sold at a discount, and the return is delivered when they are redeemed upon maturity at their higher par values.  Intermediate-term securities, called notes, have maturities including two years, three years, five years, seven years, and 10 years.  Treasury notes bear coupons which are paid twice each year.  Treasury also issues 30-year bonds, which like Treasury notes bear twice-yearly coupons.  (Treasury also sells Treasury Inflation-Protected Securities (TIPS) of five-, 10- and 30-year maturities, plus various non-marketable securities (including the familiar “savings bonds”) that are not pertinent here.)

The Treasury normally takes some steps to sell securities on almost every business day.  Treasury securities are sold at auction; bidders offer a price that they are willing to pay for a specified dollar yield.  Treasury announces its tentative financing schedule quarterly, with each tentative schedule extending over the next six months (thus being a partial revision of the previous schedule).  Treasury announces the terms of each auction at least one day (for four-week bills) or as much as a week (for longer-term securities) in advance, executes its auctions generally on Mondays through Wednesdays, and then settles the auctions usually on Thursdays (but there are exceptions to this pattern).  The major Treasury auction is a quarterly refunding, which establishes ongoing cycles of longer-term securities maturing and being refinanced with new securities.  The quarterly refundings include three- and ten-year notes, and 30-year bonds.

So where are we now?

Treasury Secretary Jack Lew has announced that as of October 17, after executing the current financing plan, the Treasury will have exhausted its borrowing authority.  That is to say, after using his various extraordinary statutory authorities (see here) essentially to replace internally held government debt (which counts against the debt limit) with informal IOUs (which don’t), the Secretary will have well and truly pushed his head up against the debt ceiling.  He will be unable to borrow any net new cash.  (In truth, there will be some additional headroom left, but it will be veritable nickels and dimes).

Therefore, without borrowing as a live option, the Secretary will be left with a bare-minimum cash balance, tax revenues coming in, and a greater amount of claims due to be paid arriving daily.  The greatest economic power in world history will be living hand to mouth.

What happens next?

The honest answer is that nobody knows.  No great financial power, no provider of the world’s reserve currency in markets that trade instantaneously around the globe, ever has been there.  The ramifications are so wide-ranging that no one can get his or her arms totally around the situation.  I can only give it my best shot.

Perhaps the one certainty is that the federal government’s basic financial infrastructure will be strained as never before.

A fundamental fact:  Until now, the Treasury has paid all of its due bills as they arrive every day, and then balanced its checkbook later that night.  When you have an ample cash balance backed by a virtually unlimited ability to borrow, you can do that.  But starting on October 17, the Treasury no longer will have an ample cash balance, because it will not be able to borrow net new cash.  If the Treasury continues its current practice of paying all its bills during the day and then doing the accounting that night, what are the chances that it may discover that it bounced some checks four hours before?  Answer:  Far, far too great for the world’s greatest economic power.  We don’t have a system to give reliable second-by-second cash balances, and we are not going to create one in the next week.

The fallout would extend beyond a potential “oops” end-of-day moment.  The Treasury could discover that paying too many of its bills that were due on a Monday and a Tuesday, followed by an unexpectedly weak revenue flow on a Wednesday, could leave it unable to pay a large bill that was due on that Thursday.

The sum and total is, again, that a payments system that was designed for the world’s greatest economic power, which reasonably could be expected never to be cash-short, will not work flawlessly in a hand-to-mouth mode.  Presumably, in time, we could build the kind of financial system we would need to count and pinch pennies.  But if we go that route at some future date, we should stop claiming to be the world’s greatest economic and financial power.

Which gets us back to the significance of the definition of “default” in the context of the United States Treasury.  Some take that word to a fine point, and say that revenue flows are sufficient to pay all interest due on the outstanding debt, and that rolling over the maturing debt is a zero-net-cost operation; and therefore the United States need not “default” in that narrow sense even if left without a debt-limit increase for a very long time.  And in fact, the Treasury’s payment system does have two separate channels: all debt finance transactions, which are internal to Treasury; and all other transactions, which come mostly from other agencies.  So Treasury literally and operationally could “prioritize” its payments in a limited sense – that is, it could pay debt service first, and then, with what funds were left over, pay what other claims it could.  So it is literally true that the Treasury could ensure that the United States did not, in this strict sense, “default on its debt.”

But there are a lot of qualifications.

First, the Treasury would fail to pay a lot of bills, and the stack of unpaid bills would get taller and taller by the day.  Then, the definition of “default” would become a real issue.  Like the household that would promise to keep its home mortgage current even while it juggled scarce cash and failed to pay its car loan and its credit-card payments, the Treasury would not look very solid to its creditors.  This is why default unavoidably would be what the financial markets say it is.  If the markets began to react negatively to the Treasury’s cash management perils, it is worth remembering that people who smell smoke in crowded theaters do not typically arrange themselves in orderly two-by-two columns; they run for the exits.  Dictionary definitions would quickly become irrelevant.

To put just the roughest order of magnitude on this factor:  From the beginning of the month through the middle of this week, before the markets began to smell concessions in the non-negotiations between the House of Representatives and the White House, the annualized yield on 13-week Treasury bills increased by more than 25 basis points (that is, more than one quarter of one percent).  That is more than one standard tightening move by the Federal Reserve Open Market Committee.  Presumably, if we had stumbled yet closer toward a debt-ceiling collision, that interest-rate increase would have continued.  And though it is always perilous to assign causation to market behavior, this episode was tied as clearly as any to the debt-limit standoff.

A second issue is that although the Treasury has a separate channel for its non-debt-service transactions, it has no capability to prioritize among claims within that channel.  Treasury has a simple filter to avoid paying claims to entities that are, for example, suspected of fraud; but it has no capability to rank its roughly 80 million payments each month by some measure of priority.  And one lesson from the news items emerging from the current shutdown (see here) is that there is a vast number of enormously diverse claims on the Treasury that virtually everyone agrees must be kept current.  Prioritizing one such instance leads immediately to prioritizing another, and another, and another.  It would be a hopeless task to try to create guidelines for each individual agency to send its claims to the Treasury in some particular order – relative to its own other claims, and relative to all of the claims of every other agency.  And all of that complexity does not speak to whether some ostensibly higher-priority claim that is currently due should be paid before some on-the-surface lower-priority claim that was due three weeks ago – noting that both claims were mandated by Acts of Congress, and therefore have equal legal standing.

And speaking of which:  Would some legal claimant whose bill was prioritized lower choose to sue, on the ground of being denied equal treatment under the law?  Could an entire prioritized Treasury payment system be hauled into court?

But it is time to loop back to the theoretical ability to prioritize the servicing of the public debt.  Remember that Treasury revenue flows are highly unpredictable.  Suppose that the Treasury decides to pay high-priority non-debt-service claims (perhaps Social Security benefits and salaries for uniformed servicemen and women), and then tax receipts come in lower than expected.  The Treasury might then not have the cash needed to pay interest on the debt, even though debt service has its own prioritized separate payment system.  Thus, like Arthur Okun’s metaphorical six-foot-tall economist who drowned in a stream that was on average three feet deep, the Treasury easily could fall afoul of data variability and the unpredictability of the future.  If the financial markets (and risk-averse investors like insurance companies and pension funds) become concerned about such contingencies, it could easily alter the functional definition of the term “default.”

And one more thought about debt service in the broader sense:  The narrowly defined refinancing of the debt (that is, as opposed to borrowing net additional cash) is on the surface a zero-sum swap of securities, and therefore not an increase of debt outstanding; but there are complexities and issues of timing.  As was explained at the outset, Treasury bills are sold at a discount.  Thus, retiring a $1,000 Treasury bill will require the sale of a bill that will raise somewhat less than $1,000, plus a little bit more.  Even coupon-bearing longer-term securities tend to be sold for less than par.  The law of large numbers should allow the management of this mismatch, but it adds one more layer of complexity to an already fraught situation.

And as to timing:  In theory, refinancing the debt entails swapping one security for another, in one zero-net-debt-change transaction.  In practice, to retire a maturing security, the Treasury needs the cash to pay the investor.  Thus, technically, the Treasury needs to sell a new bond first to retire a maturing bond later, in two separate transactions.  This is a technicality, but we are in a technical situation where the letter of the law matters.

Should the world’s greatest economic and financial power be stuck in this mire?  Every citizen is entitled to answer for him- or herself.  For sake of discourse, let’s assume that the most common answer will be “no.”

So in the absence of an Act of Congress increasing the debt limit, what can the President and the Treasury Secretary do to avoid such dire consequences?  Basically, there are two families of responses that are under consideration.

The first is resort to a part of Section 4 of the 14th Amendment to the Constitution, which reads (in case your pocket Constitution should be stuck in your pocket) “The validity of the public debt of the United States, authorized by law, … shall not be questioned.”  This amendment was ratified in the wake of the Civil War, so that the United States could both affirm its constant commitment to honor its debt while denying responsibility for debt undertaken by the newly reunited Confederacy.

Some would argue that this language contradicts the statutory debt limit itself.  How can a law restrict the power of the Treasury to honor its debt, when the Constitution itself establishes that power without limit?

In other words, and in a possibly independent argument:  If the Congress exercises its constitutional power of the purse to spend a lot and tax a little, how can the Congress then restrict the authority of the Executive to issue the debt that is essential to pay the difference?  The Congress thus puts the Executive on the horns of a dilemma:  Either the Executive violates the statutory debt limit, or the Executive violates the charge of the Constitution to honor the validity of its debt, authorized by law.  This would not be the first time when the Executive had been forced to choose between mutually contradictory legal or constitutional obligations, and the Judiciary has been reluctant to fault the Executive for making one or the other choice.  (This interpretation might be challenged as a practice of the law without a license.)

Some would argue that the Executive, so tied in constitutional and statutory knots, should simply issue additional debt – either while invoking the 14th Amendment, or simply citing the dilemma imposed upon it by the Congress and the Constitution.

The President has stated that the Treasury’s attorneys do not agree with this analysis.  I do not believe that it is unfair or unkind to say that the Treasury attorneys have a reputation for being cautious.  Their argument is that debt issued under such uncertain authority would not be received blithely by the markets.  There would be fear that the debt might be ruled invalid in the courts, and that the investors would find themselves holding worthless paper.  Again, practicing without a license, the most common analysis would seem to be that no one would have standing to sue to challenge the validity of such securities, on the ground that no one who had not voluntarily purchased those securities could claim to have been harmed.  Still, the most conservative analysis might conclude that the Treasury would not want to run any such risk.

A more likely contingency would be that the President would be impeached.  One might question whether a House of Representatives that claimed in no way to want to place the United States of America in default would take an action that would threaten at least indirectly to do just that (because the ground for impeachment would be that the President had sold bogus, unauthorized United States Treasury securities).  One might also ask whether there would be any chance that the Senate would even engage in a trial.  But again, the cautious choice would be to avoid such a contingency in the first place.

But the President and the Secretary might not enjoy such a clean option.  If the choice is between failing to pay the nation’s bills and running such legal and constitutional risks, the President and the Secretary might determine that the less-imprudent course would be to issue additional debt and invoke the 14th Amendment – regardless of what the President has said publicly to this moment.

The second broad class of options for the Executive is asset sales.  The Treasury could sell (or sell and lease back) just about any piece of federal property.  Any private (or other government) investor with some confidence could be willing to deliver cash to take ownership of real estate, military hardware, the gold in Fort Knox, or just about anything else – in return for a piece of the action.  That cash would replace an equivalent amount of additional Treasury borrowing – although because the transaction would be (shall we say) irregular, it surely would cost the Treasury more than would equal borrowing through the sale of Treasury securities.

A particular form of asset sale that has achieved considerable attention lately is the minting by the Treasury and sale to the Federal Reserve of a platinum coin.  The Treasury is authorized by law to mint platinum coins (see here), according to specifications chosen by the Secretary.  Thus, the Secretary could mint coins in denominations of his choosing, and sell them to the Federal Reserve to repay existing Treasury debt.  That would give the Treasury headroom under the debt ceiling to sell new debt to the public to raise net new cash.

No Treasury Secretary would choose to undertake such a transaction under normal circumstances; but these are not normal circumstances, and some might argue that the platinum coin would outrank a failure to meet the Treasury’s obligations in full and on time.  Again practicing law without a license, there would seem from the statute to be no prohibition against such a transaction, so there might be less legal vulnerability to the Secretary and the President than invocation of the 14th Amendment.  Yet there is little doubt that such a financial transaction would seem to the rest of the world to be beneath the United States of America – but again, perhaps not as far beneath the United States of America as playing the deadbeat.

If pushed to the wall, what would the President do?  I have no inside information, but the platinum coin feels like too much of a gimmick.  Other assets sales seem less likely, because they would entail both greater transactions costs and – perhaps most importantly – time to execute, in a world where the Treasury necessarily will be counting coins and watching the second hand on the clock.  The worst outcome – one that I believe no President and no Treasury Secretary of either political party ever would (or should) accept – would be to allow what they would perceive to be the first default (see this  for a technicality) by the United States of America.  Accordingly my money – whether in cash or Treasury securities – would be on an appropriately solemn speech, invoking the 14th Amendment and citing the Catch-22 that the Congress’s inaction has forced upon him, in which the President accepts the responsibility to sell bonds in excess of the statutory debt limit.

Our nation may have dodged this bog; but that is not yet certain, and we may find ourselves back in this unseemly place in just a few weeks.  For myself, I hope that I will not need to research this topic further.

You already have heard that the next fiscal cliff that we will encounter on our journey to Responsibility will come with the conjunction of the expiration of the appropriations at the end of this fiscal year (a date certain, September 30 / October 1, 2013) and the collision of our nation’s debt with its statutory limit (a date highly uncertain, hitherto estimated by the leading nongovernmental authority, the Bipartisan Policy Center, at somewhere between mid-October and mid-November).  But in the last week or so, Washington’s two non-negotiating negotiating partners made their first moves onto the public stage.

On Thursday of last week, the House Republican caucus reportedly held a telephone conference call during which Speaker John Boehner (R-OH) laid out the first steps in his negotiating strategy (AKA Kabuki).  The Speaker said that he would put forward a short-term continuing resolution (CR) to continue agency appropriations at this year’s level – higher than next year’s statutory spending caps – so that the threat of a government shutdown (from the expiration of appropriations) would be postponed until the onset of the threat of a debt-limit crisis – presumably to increase his side’s negotiating leverage.

The conference call, of course, was private, and we have learned only what Members on the call have been willing to relate to the press.  Those accounts, therefore, could suffer from either faulty memory or intentional spin.  But by all accounts, the Speaker’s conservative wing was not happy.  Those Members reportedly have insisted that appropriations, however short-term, should be passed only on the condition that a provision be included to prohibit the expenditure of any funds to implement the Patient Protection and Affordable Care Act (AKA “Obamacare”).  (A few Members would demand approval of the Keystone XL pipeline as well; any other precondition conceivably could be added.)

Despite what the press portrayed as vocal opposition from the conservative wing, the Speaker really didn’t offer very much to the Democratic side.  Again, he reportedly was speaking about only a temporary bill of less than one-quarter of a fiscal year’s duration – just enough to extend the appropriations standoff until the expected collision with the debt limit.  He (and Majority Leader Eric Cantor (R-VA)) reportedly suggested that the same demands regarding health-reform implementation could be attached to exhaustion of the debt limit.  And the press reports gave no indication that the Speaker suggested any change in the statutory appropriations caps.  The Congress could pass higher appropriations in a temporary bill; but without a change in the caps, the temporary overage would merely be recaptured in a later sequester, pinching government operations even harder at the end of the year.  It might even lay the groundwork for further cuts later, given the eventually lower rate of spending.

Of course, the Republican House could not actually write this scenario into law.  The Senate would not pass such a bill, and the President surely would veto it.  This maneuver would be either a political statement before a contrary ultimate agreement, or a threat that the President either capitulate on his healthcare law or suffer a government shutdown and/or a Treasury default (use of that term is controversial).  Most Washington watchers would characterize either a shutdown or a default as an extreme outcome, but a default as much the worse of the two.  That the Speaker would maneuver to connect the two outcomes suggests that he is at least keeping his options open, while extending the process would allow the heat and the pressure to build.

Then this week, the Administration acted – or perhaps reacted.  Treasury Secretary Jack Lew added to his portfolio of letters sent to Congressional leaders, which in the current environment means the Speaker, since the last postponement of the debt limit tensions in May.  In this new letter, Secretary Lew for the first time provided a point estimate of the onset of serious default risk, placing it at mid-October.  The Secretary, as he and his predecessors always have, asked the Congress to act expeditiously to increase the debt limit.  His purpose seemed to be to send a message that the drama over the annual appropriations and the debt limit could not be long postponed.

The Treasury typically is reluctant to make public point estimates of the final moment of a collision with the debt limit.  And the language of Secretary Lew’s letter suggests that its mid-October estimate is conservative.  But based on the BPC’s estimate, Secretary Lew’s request for action prior to that time is only prudent.  Truth be told, with all of the good will in the world, the Treasury cannot project its cash position with precision over even a few days.  Numerous routine cash events are none the less quite unpredictable; and at this moment the chance of military operations in Syria, and the multiple contingencies that could follow from them, is far from routine.  And this is not an annual budget deficit projection, where, as in horseshoes or hand grenades, close is good enough.  A small error in a cash projection near the debt limit could have disastrous and irreversible consequences.

Opinions differ, and are strongly held, but in my opinion the United States of America should give the widest possible berth to any risk of a failure to pay any of its bills.  Members of Congress who wish to create an action-forcing event should do so over the annual appropriations, rather than court what could become a global financial crisis.  The downside of a federal government credit event is far too great to take any chances.

It is impossible to say how this Kabuki will play out.  Rational players on both sides fear being jammed at the last instant by the other, after a failure to negotiate straightforwardly.  Congressional Republicans will accuse the Administration of waiting until the last moment before demanding a total capitulation, at the risk of the Republicans’ being identified as to blame for a default.  The Administration will counter that the Congressional Republicans want to be handed the tools for an effective negotiation over their hostage, when they had no right to take the hostage in the first place.  This is a principled debate that will not be easily resolved.

And this entire confrontation is not a negotiation where one side wants 100 and the other side wants 80, with the possible result that after lengthy and painful negotiations both can somehow find their way to accept 90 as the answer.  This is, rather, the culmination – for this year – of a long-running ideological dispute in which the disputes effectively are over the difference between yes and no, and large shares of both sides believe that compromise is totally unacceptable.  The swords in this Kabuki are not made of wood.

Enjoy the play.

Debt is bad (all else equal).  But not everything that purports to control debt is good.

There are spending cuts and tax increases that would be counterproductive.  There are budget process proposals that would tie the Congress in knots for no real gain.  And then there is the statutory debt limit.

After approving separately every individual debt issuance until World War I, the Congress simplified and streamlined debt finance by setting a dollar limit.  It made some sense, although the Department of Redundancy Department might question why the Congress, having voted to spend money, should then be required to vote again to allow the issuance of the public debt that results.  Some might wonder whether the opportunity to vote for gratifying spending programs and tax cuts that increase the debt, and then to refuse to vote to honor that debt, might confront the Congress with the temptation to play both sides of the political street – to the detriment of the full faith and credit of the United States of America.

One might also note a peculiarity of the precise statutory definition of our debt subject to the limit.  It includes the amounts of non-marketable Treasury “special certificates” in the federal government’s more than 100 trust funds.  In the best of times, those trust funds will accrue surpluses – and therefore, the federal government’s debt subject to limit will tend to go up, not down.  Consider the late 1990s, the happiest period in modern federal fiscal history.  If the budget had stayed on the track that was anticipated as of February of 2000, the Treasury over the succeeding four-plus fiscal years would have continued its then-current practice of buying back outstanding public debt in the open market, and by the end of 2004 would have retired almost $900 billion of public debt.  It also by 2004, paradoxically, would have violated the statutory debt limit (see the following chart).  So to put it mildly, the debt limit is a highly imperfect measure of the nation’s fiscal behavior.

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Attributed to the late Earl Weaver
Former manager, Baltimore Orioles

So the nation has addressed its mounting public debt problem by failing to take explicit action, and therefore allowing an automatic “sequester” of spending to take effect.  The sequester is a mindless across-the-board cut, reducing defense and non-defense spending alike, and the highest and the lowest public priorities equally.  And for all of the pain it will cause, it is far insufficient to solve the debt problem.  It is the proverbial basketball player who made up for his lack of size with his lack of speed.

The House and the Senate have passed budget resolutions that are trillions apart, literally and figuratively, and they cannot agree to go to conference to reconcile the two.  The House Speaker says that he has been jilted one too many times, and will not meet with the President privately.  The President has taken groups of Republican Senators out for very nice dinners, and even has picked up the check.  (Personal deficit spending?)  But those Republican Senators say that they cannot cut a deal without their Minority Leader, who so far apparently prefers to eat at home.  And there are no signs of any communication between the dining Republican Senators and their House Majority counterparts.

So in those immortal words reportedly shouted at the tips of innumerable umpires’ noses by the late Earl Weaver, “Are you gonna get any better, or is this it?”  Apparently, Weaver never reached a very positive opinion of the quality of major league umpiring, and there is precious little evidence to inspire much greater confidence in the workings of Washington these days.

On first principles, no one had great fondness for the sequester.  Republicans by and large could not abide the defense cuts, and Democrats felt the same about the domestic cuts.  But Democrats, including the President, concluded that the defense cuts could be used as bargaining leverage, and some even embraced the prospect of the sequester as the only way they could squeeze the Pentagon budget.

But the tables appear to have turned.  Enough Republicans have embraced the defense cuts to move the balance in their caucus; and apparently most if not all Republicans enjoy watching the Democrats squirm at the mechanistic reductions on the domestic side (including small cuts in entitlement programs, which are seldom mentioned but have real consequences).  It is easy to blame the White House’s management for any pain and suffering that eventuates, and if an intolerable problem emerges (like air traffic control or food inspection), the Republican House can easily pass a rifle-shot bill to fix it.  If the Democratic Senate were to refuse to move such a bill along, it would have to accept direct responsibility for the problem.  So while some people have expected the sequester to arouse broad-based opposition, that does not appear imminent, or perhaps even likely.

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***An abbreviated version of this blog post appeared in The Hill’s Congress Blog on April 4. This version takes a deeper dive than is possible with 750 words.***

The temporary “suspension” of the nation’s debt limit expires on May 19, 2013.  On that date, the limit will become the amount of debt already incurred (see here).  The Treasury is prohibited from “borrowing ahead” to build up a cash balance, which makes the determination of the precise amount of the limit as of that date quite complex.

But the concept is clear enough.  On May 19, the debt limit will be (approximately) what the debt actually is as of that moment.  So the Secretary of the Treasury will need immediately to revert to the use of his “extraordinary measures” – highly technical authorities granted to him by law or custom, which over the last two decades or so have become unfortunately all too ordinary – to keep the debt subject to limit below the statutory ceiling.  As always, the public is not privy to the Treasury’s own internal estimates, and the future is always uncertain; but the best analysis available suggests that the Secretary will have run out of tricks by some time in this coming August.

Therefore, with the temporary tax cut expirations resolved, with appropriations for the federal agencies finally completed for the ongoing fiscal year, and the next fiscal year not beginning until September 30, 2013 (and with that appropriations process sure to be procrastinated down to the wire), it is likely that a collision with the debt limit will be the next budget-process bottleneck that the Congress and the White House will have to traverse.

Institutional memories are short in Washington, and history often is revised before it is written.  Somehow, a decent interval after the fact, 100 percent of the players on both sides of each Washington contest believe that they won the game.  So it is likely that the lessons of August, 2011 – and of the last several debt-limit standoffs – have not been learned as they should.  Thus, it is worth taking the opportunity of the waning days of the Easter/Passover congressional break to review just why going to the brink over the nation’s debt limit is such a bad idea.

This should not be a partisan issue.  The points below would apply regardless of who is in control of the White House, the Senate, or the House of Representatives.  Today’s situation is unique in detail, as is every day in Washington; but the amount of the stakes on this issue is always the same: approximately everything we’ve got.  So both current and future Congresses and Administrations should consider the following:

A fight over the debt limit is prone to disaster.  Even though the stakes on the debt limit are monumental, Members of Congress will always be inclined to grasp any opportunity to extract concessions from a President with different views.  Still, over time, standards of behavior on this front have deteriorated.  As they push a President further and further toward the brink, Members today should consider the precedent they risk setting.

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I was fortunate enough to be invited to a breakfast with House Budget Committee Chairman Paul Ryan (R-WI) earlier this week.  You may have seen some stories on that conversation, primarily in the Wall Street Journal, whose David Wessel and Gerald F. Seib organized the event.  (A transcript is available to those with Wall Street Journal access in two parts, here and here.)  A couple of takeaways for me:

Image found here.

Some press reports, including an editorial in the Washington Post, had suggested that House Republicans had foresworn the old “Boehner Rule” – which dictated that there be $1 of spending cuts for every $1 increase in the debt limit.  The Post said that this change was highly meritorious, because there could be serious consequences if the debt limit were subject to such uncertainty.  However, Chairman Ryan made clear that the Boehner Rule is alive and well, even though it may temporarily be suspended.  Chairman Ryan saw two potential ways forward – that is, toward significant deficit reduction, in fact a balanced budget in ten years.  One would be bipartisan cooperation, which he did not rule out but saw as unlikely.  The second was the use of rolling “fiscal cliffs,” including the expiration of continuing resolutions for annual appropriations, deadlines for sequesters, and applications of the Boehner Rule for short-term increases in the debt limit.

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An opinion column from Friday’s Wall Street Journal painted a sanguine picture of the potential collision of the United States Treasury with its statutory debt ceiling.  The column, entitled, “The Myth of Government Default,” by David B. Rivkin, Jr., and Lee A. Casey, can be found here if you have an Internet account with the Journal, but just in case I will offer the following brief excerpt:

 Contrary to White House claims, Congress’s refusal to permit new borrowing by raising the debt ceiling limit will not trigger a default on America’s outstanding public debt, with calamitous consequences for our credit rating and the world’s financial system. Section 4 of the 14th Amendment provides that “the validity of the public debt of the United States, authorized by law . . . shall not be questioned”; this prevents Congress from repudiating the federal government’s lawfully incurred debts… Should Congress fail to increase the debt ceiling as much as the president wants, the effective result would be major government spending cuts, with payments on public debt excluded.

Allow me to provide a slightly more elaborate and general summary of this argument as it circulates in the Washington ether.  Admittedly, this argument is somewhat less measured and nuanced than that presented by Rivkin and Casey.

Some believe that failure to increase the statutory debt ceiling would cause the federal government to default, which those persons contend would entail serious ill effects, this argument goes.  However, in fact, even if the debt limit is not increased, the federal government need not default, which is defined accurately as the failure to service or redeem in a timely fashion its outstanding debt instruments.  The courts have held that servicing the debt, which is mandated by the Constitution, has rightful precedence over paying other obligations, which are sanctioned by mere laws.  So the correct policy choice today is to refuse to increase the debt ceiling, and thereby to win political leverage in the debate over the budget – which can be achieved at no risk of a financial market event.

I see three major problems with this argument.

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