Why the United States Cannot Default


In this post, I am not going to argue that the USA should not default because it will cause havoc in global financial markets. This — if the debt limit is not raised or abolished via a trillion dollar coin or other means by October the 17th — is a distinct possibility, but much has been said of this already. Nor am I going to argue that the United States Treasury will somehow manage to skirt defaulting via emergency austerity measures. This is possible too, though has also been discussed elsewhere.

I am going to argue that in the long run, whether the United States raises the debt ceiling or not, it is technically impossible for the United States to default. This simple fact is encoded in the Fourteenth Amendment to the Constitution:

Section 4. 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.

While bondholders may not get their money including interest immediately, the courts will rule in their favour when the matter comes to court. The Fourteenth Amendment is absolutely clear on that. Some credit default swaps may trigger (this depends, I think, on the wording of individual credit default swap contracts, which in itself may cause further confusion) but in the end bondholders will absolutely and assuredly get their money. This means that United States Treasuries remain low-risk assets. And that — even in the event of default — should keep interest rates on Treasury debt relatively low. There will be no crushing exit of the bond vigilantes — after all, why would they choose to crash a market they are already deeply invested in if they will sooner-or-later get paid? People, generally, who buy large quantities of US Treasuries are not sitting around and reading libertarian blogs pondering the issues of dollar debasement and the end of the dollar as the global reserve currency. The latter may be a real longer term issue, and I think in the next 50 years, perhaps even the next 20 years we will see more alternative reserve currencies emerge. But that is another story for another day.

In the medium term and the short term the thing that is keeping bond buyers buying bonds is the search for yield over cash. If you have billions of dollars in cash at your disposal as many investment managers and countries do, and your imperative is low-risk yield, government debt beats cash that yields nothing, it beats commodities speculation and stock market speculation, and it beats corporate bonds as corporations are not sovereigns. A guaranteed dollar-denominated yield, even a very low one is still very attractive to treasury buyers, even if some large treasury buyers like the Chinese government have made some bond-vigilante-like noises in the past few years. These have thus far proven to be hot air, even if I have in the past made the mistake of paying too much attention to such noises.

Personally, I wish to see the debt ceiling abolished entirely, either through the absurdity of trillion dollar coins (my original objection, that authorising a trillion dollar coin would look silly has been made entirely moot by the fact that the United States Congress already looks extremely silly due to the ongoing standoff) or otherwise. At the very least, the debt ceiling should be denominated in real economic activity, not an arbitrary number of dollars, and in setting such a ceiling it should be remembered that Great Britain successfully sustained and paid down a sovereign debt of over 250%. Higher sovereign debt levels for a rich, powerful country like the United States are not dangerous. It is — as we are seeing — destructive both to markets and to society that a sovereign can be reduced to gridlock and turmoil and confusion over such a simple thing as a spending or borrowing authorisation. The real dangers here are not overspending or running out money, but unnecessary forcible austerity imposed by lawmakers, sucking money and economic activity out of the economy, and creating chaos and confusion in markets. There are already many real problems in the US economy — millions of people unemployed, weak growth, lack of job creation, private debt overhang and slow, painful deleveraging. The last thing the US economy needs is an unnecessary crisis of uncertainty and confusion created by economic illiterates in Congress.

34 thoughts on “Why the United States Cannot Default

  1. “You will have to sue and then wait for your money”
    “United States Treasuries remain low-risk assets”

    Your economic insights are astonishing.

    • You’ll get your money back. It’s constitutionally guaranteed. Going to court for it — a petition bondholders are guaranteed to win — is a worst case scenario, and therefore very unlikely. Where’s the risk to the nominal principal?

  2. Don’t count your constitutional conclusions before they hatch!

    Shortly after Jerry Ford, as I recall, if it were he who was President at the time, signed a bill de-criminalizing the mere possession of gold by American citizens, a group of holders of pre-1933 gold bonds sued for payment of the solemn promise of the USA to redeem the same (at $20 per ounce!). This was clearly a debt “guaranteed” by the provisions of the 14th amendment, as the provisions of the bonds were unambiguous in every sense.

    Needless to say, the Courts did not exactly step up to the plate, and these guys got nothing except depreciated fiat script–contrary to the terms of the debt instrument. (And this was at a period when the government could have easily, if it wished, actually honored its written and solemn pledge.)

    The government will indeed “pay” its creditors — by selling more bonds to its own creation, the FED, who has a monopoly on money creation. A very unpretty sign of perfidy. Banana Republic with bombs and storm troopers.

  3. “The real dangers here are not overspending or running out money,…”

    This is how people in government think.

    This is not only a danger, but it is generally the end of any financial system.

    And this is why they [financial systems] come, and why they go. The people in charge are never satisfied with stealing a little, no, they have the f******* take everything!

    Groups are not your friends.

  4. The Constitution provides that the U.S. Treasury can “coin and print money”. Although I don’t believe that it has been done since the end of the Second World War, the treasury can just pay its bills with money it creates, without the bond market, and without the GFederal Reserve’s involvement at all.

    Of course the inflationary impact would be immediiately apparent. But this could be a good thing, if it brings inflation to the forefront of our political system. Perhaps the drive to balance revenues with expenditures would finally return our current accounts to a positive. Perhaps we could wean ourselves off of debt dependency.

  5. The problem is not the debt. At any fixed level as a percentage of GDP, debt can be sustained forever. The problem is the increase of debt as a percentage of GDP. It is that increase which causes ultimately a run on a currency. There is no need to repay the debt as long as the net increase of debt is growing below the growth rate of the economy.

    It is all about the increase in debt. In other words, the problem is the corruption of the work ethics. People expect to consume more than they earn by working.

    • “The problem is not the debt.”

      You might have difficulty explaining that concept to the inhabitants of every empire that has crashed and burned [all of them] over the centuries.

      • The Roman empire didn’t crash because it owed money to any external entity. It crashed because it was overrun by the military might of Goths, Vandals, Visigoths etc. It didn’t owe money to the latter lot of North European tribes.

        And the British empire is a pale immitation of its former self. That’s not because Britian is nowdays hopelessly in debt. It’s because various colonies gained / fought for independence.

        • Ralph, all ventures fail because of financial imprudence. No matter how you wish to characterize it, getting into financial difficulty always has as its birth-mother – DEBT [in all its various EVIL forms].

    • The debt is even less of a problem than you claim, at least in the following sense. US debt is currently only a half of what it was relative to GDP just after WWII (same goes for the UK). Thus the debt of the US and UK could comfortably DOUBLE: bringing their up to the level of Japan.

      Plus as long as the interest a country pays on its debt is a miserably low rate, as it is with Japan, then no problem.

      In fact the nearer the rate of interest on debt gets to zero, the more indistinguishable it becomes from money (monetary base to be exact). But that point is way beyond the comprehension of politicians.

      • Ralph, Japan is a complete financial nightmare.

        Debt [bringing future income forward] is an insane idea that the greatest thieves of all-time keep convincing people is good for them, despite millennium of evidence to the contrary.

        You must make a living from such, no?

  6. I would point to how the government handled the GM bailout as to whether or not bond holders are safe. As we all know the GM bond holders were screwed by the government so the unions could be paid, thus denying debt holders their money. Seems that the government is perfectly willing to cut debt holders out when they deem it necessary

  7. Pingback: The Problem With the Trillion Dollar Coin | Edward Antrobus

  8. My comment is less about the theory but about what else is going on. Whilst every one is focused on the debt ceiling what else are they getting up to without being scrutinized? I think this is a smokescreen for another agenda, I think they are engineering this crisis in order to justify a Cyprus like event in the US, and my guess would be for it to happen within the next 12 months. (they may need to escalate this crisis but I think its the warning shot)

  9. Yeah, the constitution. Well loved and respected by all US politicians. I think they see it at best as an antiquated set of “guidelines” rather than “law” to be upheld – unless of course it suits their objectives.

  10. I completely disagree with your point. Before the Obama administration usurped America and law, I would have agreed with you, but not now. Do you remember what our current administration did to the Chrysler bondholders? They threw our centuries of law, to satisfy the UAW. They screwed the bondholders, the ones first in line, deprived them, and then on top of ignoring centuries of codified law, gave what was rightfully theirs (the bondholders) to the union bosses!

    This example illustrates the depth of the corruption. The rule of law and the constitution means nothing to our administration or the current party in power. That is a fact.

    Your basic argument is: Rule of Law. So, sorry to disagree, but recent history shows they will just ignore what ever they need to to give to their friends and screw the rest of the Americans.

  11. Man-made constitutions are transient. We must question the morality of holding one generation responsible for the debts of another.

    “By justice a king builds up the land, but he who exacts gifts tears it down. “(Proverbs 29:4 ESV)

      • Milton Friedman and Warren Mosler advocated that governments should have no debt: i.e. the only liability they should issue should be money (monetary base to be exact). I agree with them. Monetary base is effectively debt that pays no interest (though at the moment the Fed for some bizarre reason chooses to pay a small rate of interest on monetary base).

    • Ahh “idiots”. But which is leading – debtors or savers? There was an antiquated view that before you could consume you had to save. Pfff, such 19thC thinking! Heck just spend and someone will be there to Save or maybe inflation will fill the gap. Your argument is pure genius on a stick – lets just spend so we enable others to save – brilliant! Not withstanding the abuse of the economy – the more govt spends in a tide of saving the economy reconfigures to serve it alone – in a ***mal-investment*** – a waste of money and effort – for a market that does not voluntarily exist! Go figure that one.

    • Ralph, you can call it whatever you wish, but this doesn’t change the fact that what is going in is counterfeiting and 2000 counts of fraud.

      Remember, money is an abstraction of labor-value. You can not just create it out of thin air without dire economic and financial consequences.

      These people in banking and governments have been perpetrating this fraud forever, with quite predictable results.

      The organization of anything financial is always about stealing.

  12. The Five Basic Laws of Human Stupidity:

    “The 4 Basic Categories of Human Action

    If Dan does something that causes himself a loss, but a gain to Sarah, he is helpless. If Dan does something that causes a gain to himself and a gain to Sarah, he is intelligent. If Dan does something that causes a gain to himself and a loss to Sarah, he is a bandit. Now, If Dan does something that causes a loss to himself and a loss to Sarah… this is true stupidity.”

    As Impermanence said, “The people in charge are never satisfied with stealing a little, no, they have to f******* take everything!”

    The government is debasing the currency. Pure and simple, this is theft. The losers (who should have been wiped out) didn’t like the view, so they decided to steal, steal from all of the people who worked hard. They want to benefit (cause a gain to themselves), while causing a loss to others.

    They are bandits.


  13. On the bright side, the meaning of a section or clause of the constitution has never been construed in a way that would seem contrary to what it means to any reasonable observer. I’m sure that the US government will feel bound by the words “validity” and “shall not be questioned”.

  14. Previous comments/replies, especially Top Hat’s and Doug Walton’s, have done a good job of balancing John’s “Keep Calm and Read the Constitution”‘ optimism. May I add, for perspective and the long view, that, while immediate “default” is not a serious threat, ultimate sovereign bankruptcy*-default and/or hyperinflation IS.

    The near-term threat is, of course Obamacare**, a huge step in the planned, progressing Socialization*** of America.

    * Federal government ONLY: debt ~ $50,000 per capita; total unfunded liabilities > $300,000 per capita.

    ** I quote a 10/16/2013 Investor’s Business Daily editorial. “ObamaCare is, without doubt, the most haphazardly conceived, clumsily written, deviously passed and poorly executed law in American history. It is an unmitigated disaster of epic proportions.

    “Democrats made huge drafting errors, Obama himself has ditched, delayed or waived several unworkable parts. The Supreme Court found a major chunk unconstitutional. … Workers are seeing their hours cut or their jobs eliminated. Unions say (Obamacare) will destroy long-standing multiemployer health plans. And countless people are getting cancellation notices on their existing policies. …The administration’s implementation has been borderline criminally negligent.”

    *** The plan: Continue to expand impoverishment and the sense of individual/family helplessness/dependency, while eliminating free-enterprise, starting with the hated “bourgeoisie” (small business/entrepreneurs) and partnering with big business and finance. The Tea Party justified protest, “Washington vs. The People”, morphs into Pennsylvania Avenue and Wall Street RULE The people. [Example: as Obamacare unfolds, PRIVATE-sector jobs, hours, and income drop, while government and insurance companies (big businesses) add jobs, big business gets an extension, and the Congress gets a pass].

    • It appears that the default hobgoblin has been fended off for a while. All the ridiculous TV “analysts” can talk about is who won/lost, Democrats or Republicans. Nobody in New York or Washington thinks to ask how THE PEOPLE fared!

      I think that the significant result is that both Obama and the people are stuck with the Obamacare train wreck. But we won’t have Obama to kick around in 2016 — it will be Hillary carrying as many “I’M NOT OBAMA” signs as her world-champion political cynicism dictates. So we better clean house in the Congress in 2014!

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