The US debt ceiling seems to be an endless source of political wrangling, with parties blaming each other and threatening economic chaos. One would almost forget that debt repayment is not up for debate. Not even in the US.
«President Biden is driving America towards its first-ever default, and no one but him will be blamed,» shouts a television ad from the Republican advocacy organisation American Action Network.
«Republicans have done their duty by passing popular reforms that prevent default and address America»s out-of-control spending. It is time for the president to wake up and get serious about a deal to prevent defaults,» the female voice continued.
To get Republicans to raise the debt ceiling, Democrats must agree to the «Limit, Save, Grow Act», a bill to cut Gov. Biden’s spending. Government spending should be brought back to the fiscal year 2022 level, and annual spending growth should be limited to 1 per cent, the proposal said.
«If we don’t pay back our debts on time, the whole world has a problem,» President Joe Biden said at a press conference on Tuesday. He is therefore trying, exactly as advertised, to reach a quick agreement with House Speaker Kevin McCarthy, the Republicans» representative in the debate.
But, to protect the US economy, and avoid turmoil in the financial markets, there does not need to be a deal at all. The solution was already there in 1868: Article 14 of the US Constitution.
Solution presents itself
The fourth paragraph of the 14th article in the US Constitution states that the validity of the public debt of the United States, authorised by law, including debts incurred for the payment of pensions, shall not be questioned.
«So it does not say: Congress should pay the debt, or it would be nice if they paid the debt. It says that state debts are paid off,» Garret Epps, professor emeritus of law at the University of Baltimore, told US broadcaster MSNBC. That fundamental right could be used without much difficulty to settle this dispute once and for all, Epps said.
President Biden stated at a press conference on Tuesday that he was open to the argument, but largely rejected the idea of pursuing the option in the context of the current impasse. He noted that the use of the 14th amendment would be challenged in court, raising similar questions of default and possible chaos in the market. «When we get past this, I think about taking a look at it,» Biden added.
Lawsuits don’t stand a chance
According to Harvard Law professor Laurence Tribe, the president need not fear lawsuits.
Tribe said it will be very difficult for House Republicans - who have hinted at challenging the President’s use of the 14th Amendment - to sue the President for violating the Constitution. He does not, Tribe said, and he expects the Supreme Court to dismiss such a case.
«It becomes very complicated for Congress to sue the president and the finance minister for spending money that Congress has said they should spend,» Tribe said.
Despite President Biden’s hesitations, Epps hopes «someone has secretly written down a plan in the back rooms of the White House to make use of the 14th amendment anyway». The market is also yearning for a solution.
Default
Indeed, an actual default on US government debt, would seriously disrupt financial markets. «Falling stock prices and a loss of confidence among consumers and businesses would accompany a recession, reducing access to credit markets,» according to the official White House website.
«The extent of losses would depend on the duration of the default, but even a short default would have immediate and profound effects on the economy. Interest rates will shoot up, short-term funding markets essential for the flow of credit would shut down and the US credit rating would be downgraded to ‹limited default›.»
Meanwhile, interest rates on US Treasury bonds maturing around X date - the estimated date when the US will reach its debt ceiling limit - are already substantial. Concerned investors are demanding 5.5 per cent interest rates on US government bonds with a one-month maturity. This time last year, half a per cent was enough for them.
This article originally appeared in Dutch on InvestmentOfficer.nl.