{"id":5357,"date":"2023-05-07T10:44:26","date_gmt":"2023-05-07T14:44:26","guid":{"rendered":"https:\/\/ifintechworld.com\/markets\/why-courts-will-never-uphold-the-faux-debt-ceiling\/"},"modified":"2023-05-07T10:44:28","modified_gmt":"2023-05-07T14:44:28","slug":"why-courts-will-never-uphold-the-faux-debt-ceiling","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=5357","title":{"rendered":"Why Courts Will Never Uphold the Faux \u2018Debt Ceiling\u2019"},"content":{"rendered":"
\n

During our nation\u2019s last \u2018debt ceiling\u2019 imbroglio about a decade ago, one might have suspected Republicans were trying their hand at the old Nixon \u2018mad man\u2019 gambit. A fine way to get one\u2019s way, Nixon had confided, is to let your counterparty in a negotiation believe you\u2019re sufficiently lacking in sanity as to welcome Armageddon if you don\u2019t get your way. That way, he argued, you persuade your sane counterparty to give in.<\/p>\n

Certainly that\u2019s how things looked back in 2011. Yes, some of the \u2018Tea Party\u2019 types who\u2019d 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\u2019s partial capitulation in that year and full capitulation in 2013.<\/p>\n

This time, however, it seems the Republican House might be literally mad \u2013 at least in the sense our first Treasury Secretary, Alexander Hamilton, had in mind when he spoke of \u2018the imbecility of our [pre-Constitutional] Union.\u2019 The idea connoted incontinence, incoherence, incapacity to exercise collective agency. And that is how Congress looks now \u2013 the Republican House Caucus, at any rate \u2013 with as little as one lunatic able to pull the plug on the House Speaker\u2019s leadership.<\/p>\n

While this might seem to render real motion on the federal \u2018debt ceiling\u2019 this time more remote even than last time, it might actually bring it, ironically, closer<\/em> to easy success. The reason at first might ring counterintuitive, but stick with me a moment\u2026<\/p>\n

<\/fbs-ad><\/p>\n

The reason a debt ceiling fiasco might be easier-averted this time than last time is rooted in two factors.<\/p>\n

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 \u2018humor\u2019 the \u2018fiscally demented\u2019 or \u2018fiscal terrorists,\u2019 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\u2019s \u2018madmen\u2019 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.<\/p>\n

The second reason has to do with that financial volatility itself, in combination with the clinical lunacy of the President\u2019s counterparties…<\/p>\n

In light of the latter, President Biden is almost certain to follow advice I and others have offered since 2011 \u2013 namely, simply to ignore the putative ceiling in virtue of its preemption both by the budget itself, which is law that came \u2018later in time\u2019 than the last debt ceiling hike under the Liberty Bond Act of 1917, and by the 14th<\/sup> Amendment to the US Constitution. When he does this, in turn, either he wins by calling Republicans\u2019 bluff, or he is challenged before the Supreme Court, which will invalidate the \u2018debt ceiling\u2019 canard once and for all.<\/p>\n

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\u2019ve 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.<\/p>\n

Suppose, then, a default on the US national debt \u2013 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 \u2026<\/p>\n

The first thing that we would see would be a collapse of the US banking system, the financial markets, and most of the world\u2019s capital markets. This would occur through multiple channels.<\/p>\n

For one thing, US Treasurys outstanding, valued at $25 trillion (by far the largest asset market in the world), are the primary \u2018safe asset\u2019 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\u2019s rate hikes. An outright default would leave us nostalgic for the placidity of the present troubled moment.<\/p>\n

For another thing, Treasurys are the literal instantiation of the hypothetical \u2018risk-free asset\u2019 used in all of the principal pricing models used by the trading houses in pricing, buying, and selling securities on the capital markets \u2013 from the CapM to Steve Ross\u2019s Arbitrage Pricing Model. In effect, US default would leave all traders flying blind. World securities markets worldwide wouldn\u2019t simply \u2018plunge.\u2019 They would cease.<\/p>\n

The second thing we would see would be an instant collapse of the dollar worldwide as global reserve currency. Our currency\u2019s value in relation to others\u2019 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\u2019s 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<\/sup> century US.<\/p>\n

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\u2019Estaing once called the US\u2019s global \u2018exorbitant privilege.\u2019<\/p>\n

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 \u2013 a consequence dramatically at odds with Republicans\u2019 professed \u2018concerns\u2019 in attempting to hold the debt ceiling hike hostage to preposterous budget cuts. It almost make you think that \u2018fiscal responsibility\u2019 isn\u2019t what McCarthy\u2019s Caucus is after at all, that what it actually wants is a Weimar style putsch amid chaos chaos in 2024.<\/p>\n

Which takes us back to the Court. However \u2018radical\u2019 some of the Supreme Court\u2019s more rightwing Justices might be, even they understand that \u2018the Constitution isn\u2019t a suicide pact.\u2019 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 \u2018ceiling\u2019<\/em> by budgeting itself since 1974, and was of doubtful 14th<\/sup> Amendment conformity, at least as now interpreted by Republicans, ab initio<\/em> in 1917.<\/p>\n

All but perhaps Justice Thomas will accordingly strike that bill \u2018as [it would be] applied\u2019 by Republicans should they try to sue President out of simply ignoring the ersatz \u2018debt ceiling\u2019 come June. And that will be lovely, for it\u2019s high time, by now, that we ceased pretending the \u2018debt ceiling\u2019 was ever really \u2018a thing.\u2019<\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

During our nation\u2019s last \u2018debt ceiling\u2019 imbroglio about a decade ago, one might have suspected Republicans were trying their hand at the old Nixon \u2018mad man\u2019 gambit. A fine way to get one\u2019s way, Nixon had confided, is to let your counterparty in a negotiation believe you\u2019re sufficiently lacking in sanity as to welcome Armageddon […]<\/p>\n","protected":false},"author":1,"featured_media":5358,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[241],"tags":[83],"class_list":["post-5357","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-markets","tag-featured"],"yoast_head":"\nWhy Courts Will Never Uphold the Faux \u2018Debt Ceiling\u2019 | iFintechWorld<\/title>\n<meta name=\"description\" content=\"During our nation\u2019s last \u2018debt ceiling\u2019 imbroglio about a decade ago, one might have suspected Republicans were trying their hand at the old Nixon \u2018mad\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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