During our nation’s last ‘debt ceiling’ imbroglio about a decade ago, one might have suspected Republicans were trying their hand at the old Nixon ‘mad man’ gambit. A fine way to get one’s way, Nixon had confided, is to let your counterparty in a negotiation believe you’re sufficiently lacking in sanity as to welcome Armageddon if you don’t get your way. That way, he argued, you persuade your sane counterparty to give in.
Certainly that’s how things looked back in 2011. Yes, some of the ‘Tea Party’ types who’d entered Congress that January appeared literally mad. But the likes of John Boehner, Paul Ryan, Eric Cantor and even then-new Congressman Kevin McCarthy surely would not commit national fiscal suicide, many thought. And they proved to be right, as witness their party’s partial capitulation in that year and full capitulation in 2013.
This time, however, it seems the Republican House might be literally mad – at least in the sense our first Treasury Secretary, Alexander Hamilton, had in mind when he spoke of ‘the imbecility of our [pre-Constitutional] Union.’ The idea connoted incontinence, incoherence, incapacity to exercise collective agency. And that is how Congress looks now – the Republican House Caucus, at any rate – with as little as one lunatic able to pull the plug on the House Speaker’s leadership.
While this might seem to render real motion on the federal ‘debt ceiling’ this time more remote even than last time, it might actually bring it, ironically, closer to easy success. The reason at first might ring counterintuitive, but stick with me a moment…
The reason a debt ceiling fiasco might be easier-averted this time than last time is rooted in two factors.
The first is the likelihood that most House Republicans really are clinically mad this time around, such that President Biden, unlike his predecessor Mr. Obama, will see literally no point in aiming to ‘humor’ the ‘fiscally demented’ or ‘fiscal terrorists,’ as Biden has colorfully referred to them. The belief he could reason with nearly anyone, after all, surely led Mr. Obama to play ball with 2011’s ‘madmen’ of the Nixon type for as long as there was any hope they were actually sane. And this in turn fueled the long-drawn-out character of the negotiations that time, always a primary source of financial uncertainty and consequent volatility.
The second reason has to do with that financial volatility itself, in combination with the clinical lunacy of the President’s counterparties…
In light of the latter, President Biden is almost certain to follow advice I and others have offered since 2011 – namely, simply to ignore the putative ceiling in virtue of its preemption both by the budget itself, which is law that came ‘later in time’ than the last debt ceiling hike under the Liberty Bond Act of 1917, and by the 14th Amendment to the US Constitution. When he does this, in turn, either he wins by calling Republicans’ bluff, or he is challenged before the Supreme Court, which will invalidate the ‘debt ceiling’ canard once and for all.
Why do I prophesy the latter so unabashedly? Easy: both because the legal case is so slam-dunk, and because the consequences of getting this wrong are quite literally beyond calculation. I’ve published plenty on the first claim in other venues, so will leave the arguments from statutory interpretation and the Constitution to one side. Here let me sketch the aforementioned consequences, which no Justice other than, possibly, Clarence Thomas would countenance.
Suppose, then, a default on the US national debt – the first in our history, effectively undoing what Hamilton and all his successors undertook to ensure: a national credit rating beyond all cavil and above reproach …
The first thing that we would see would be a collapse of the US banking system, the financial markets, and most of the world’s capital markets. This would occur through multiple channels.
For one thing, US Treasurys outstanding, valued at $25 trillion (by far the largest asset market in the world), are the primary ‘safe asset’ held in all banking, pension fund, mutual fund and other business portfolios. Our present regional bank crisis is occurring in response to a slight haircut on low yield Treasurys thanks to Mr. Powell’s rate hikes. An outright default would leave us nostalgic for the placidity of the present troubled moment.
For another thing, Treasurys are the literal instantiation of the hypothetical ‘risk-free asset’ used in all of the principal pricing models used by the trading houses in pricing, buying, and selling securities on the capital markets – from the CapM to Steve Ross’s Arbitrage Pricing Model. In effect, US default would leave all traders flying blind. World securities markets worldwide wouldn’t simply ‘plunge.’ They would cease.
The second thing we would see would be an instant collapse of the dollar worldwide as global reserve currency. Our currency’s value in relation to others’ is primarily rooted in global demand for dollar-denominated financial assets, since we have relinquished goods export primacy to China. Since Treasurys are by far the most voluminous such asset, their collapse would be the dollar’s collapse. This would of course instantly render the imports on which we rely in effect infinitely more expensive. Inflation would look more like that of Weimar Germany than of the 21st century US.
And this is to say nothing of what will be our subsequent incapacity to pay for military bases and other assets, not to mention the thousands of US military personnel, posted abroad. In effect, only China would now be a world-bestriding global superpower, further abetting the moves it is already making, with Russia, Brazil, and other nations, to displace the dollar as what Giscard d’Estaing once called the US’s global ‘exorbitant privilege.’
Finally, as if the foregoing were not enough, even the prospect of US default will instantly raise debt-servicing costs, in effect rendering our current deficit immeasurably larger than it is – a consequence dramatically at odds with Republicans’ professed ‘concerns’ in attempting to hold the debt ceiling hike hostage to preposterous budget cuts. It almost make you think that ‘fiscal responsibility’ isn’t what McCarthy’s Caucus is after at all, that what it actually wants is a Weimar style putsch amid chaos chaos in 2024.
Which takes us back to the Court. However ‘radical’ some of the Supreme Court’s more rightwing Justices might be, even they understand that ‘the Constitution isn’t a suicide pact.’ Even less so is the 1917 Liberty Bond Act, which has long since been superseded by a new Congressional budget process that has determined its own ‘ceiling’ by budgeting itself since 1974, and was of doubtful 14th Amendment conformity, at least as now interpreted by Republicans, ab initio in 1917.
All but perhaps Justice Thomas will accordingly strike that bill ‘as [it would be] applied’ by Republicans should they try to sue President out of simply ignoring the ersatz ‘debt ceiling’ come June. And that will be lovely, for it’s high time, by now, that we ceased pretending the ‘debt ceiling’ was ever really ‘a thing.’
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