Is the Financial Crisis Leading to a Constitutional Crisis?

Includes: TLT
by: Investment Pancake

Every single financial instrument on Earth is, ultimately, nothing more than a contract. The value of any contract is directly proportionate to the question of how and whether one party may enforce the terms of the contract against the other party, if that other party decides maybe that it doesn't want to perform its end of the bargain. Take away the element of enforceability and the contract isn't worth the paper it is written on.

The framers of the United States Constitution were not oblivious to the importance of the law of contracts, and incorporated it into the 14th Amendment. Section 4 of Article 14th of the U.S. Constitution reads:

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.

But over the past few weeks, the President and multiple Congressional leaders have questioned whether the United States might in fact default on some of its public debt obligations if a debt ceiling deal isn't reached in time. Last week, for instance, the President stated that he could not guarantee that Social Security payments (which are public debts of the United States incurred for payment of pensions) would be paid on time without a timely debt ceiling deal. Simply by raising that possibility on the public record, did the President question the validity of the public debt of the United States? And what of the myriad of Congressional leaders who have indicated that it might be okay for the United States to default on some of its obligations for just a little while? Are those statements tantamount to a violation of Article 14th of the Constitution?

The answer to that question centers on the legal definition of the word “validity” in the Constitution. If “validity” only means “legal enforceability,” then one could argue the President has not questioned the validity of the U.S. public debt; he's simply questioned whether it will actually get paid on time, not whether it is legally enforceable.

But in the context of a public debt obligation, the term “validity” takes on a more nuanced legal meaning. In Perry v. United States, 294 U.S. 330 (1935), the Supreme Court ruled that Section 4 of Article 14th of the Constitution prevents Congress from voiding any provision of a United States government bond after the bond has been issued. But the Supreme Court went well beyond that, and pointed out that the very purpose of Section 4 of Article 14th is not simply to defend the legal enforceability of U.S. public debt obligations, but to ensure the “punctilious fulfillment” of the debt contract. Put simply, the Supreme Court held that under the 14th Amendment, “validity” doesn't simply mean "you can enforce the terms of the bond if it doesn't get paid on time or in full"; it means something like, “it actually will get paid on time and in full.” And that is what the 14th Amendment strictly forbids any member of the federal government from questioning.

But throughout the debt ceiling debates, that is precisely what the President and key Congressional leaders have done. Based on the Perry case, this behavior is more than mere political drama; it may very well equate to questioning the validity of the United States' public debt. If so, then the President, and a large number of Congress members have already violated Section 4 of the 14th Amendment and, as such, their oaths of office to preserve, protect and defend the Constitution. If so, the President and multiple Congressional leaders lack any legal basis to remain in office, and we are in a de jure state of Constitutional anarchy.

The notion that a politician could violate his or her oath of office by simply stating the obvious -- that a deal on the debt ceiling may not be forthcoming -- seems an extreme reading of the plain text of the 14th Amendment -- but at a minimum, any actual steps the Congress takes (or fails to take) to foment an actual default by the United States on its obligations certainly seems within the scope of the Perry case, and certainly appears to amount to a violation of the Constitution.

The main issue here is that even the simple fact that such an outcome is within the realm of possibility points to a broader risk that the rule of law is weaker than anyone expected. And if that is in fact the case, then the value of every single asset that trades on any exchange on Earth is much lower than we think -- and at the moment, prices don't reflect that.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.