Is the debt ceiling constitutional and has the U.S. ever defaulted?

Douglas Rissing

A standoff over the debt limit has prompted administration officials to once again explore the constitutionality of the ceiling as the U.S. inches closer to a catastrophic default. While President Biden has repeatedly said it is the job of Congress to raise the ceiling, what happens if a compromise cannot be reached? One such theory, which would surely expose the government to lawsuits, would see new debt continue to be issued under the 14th Amendment, which maintains that the "validity of the public debt of the United States... shall not be questioned."

Bigger picture: Lawyers at the White House, Treasury and DOJ have never issued formal opinions on the question, but expect the backlash to be immense if the option - once deemed as unthinkable - was used. Financial markets would also be roiled in such an event, with Moody's Analytics forecasting "spiking interest rates and plunging equity prices," as well as the freezing up of short-term funding.

"The Treasury could just ignore Congress and issue notes and bonds with coupons well above current yields," writes SA contributor James Baker, referencing a novel solution to the debt crisis. Another one that uses an accounting ploy, called the "trillion-dollar coin," has been previously referred to by Janet Yellen as a "gimmick."

Why does the U.S. even have a debt ceiling? The U.S. first instituted a statutory debt limit with the Second Liberty Bond Act of 1917, setting the aggregate amount of debt that could be accumulated through individual categories like bonds and bills. Later in 1939, Congress instituted the first limit on total accumulated debt over all kinds of instruments. The debt limit exists to ensure the "power of the purse" stays with the legislative branch and frees up Congress from approving each individual expenditure, though most countries do not have a limit and debate the funding of their spending during the budgetary process.

Has the U.S. ever defaulted? While the technicals are always debated, and some say the U.S. has never formally defaulted, there were some scenarios in the past that could resemble it. The first time was in 1790, when the U.S. defaulted on its external debt obligations, while during the Great Depression in 1933, America had another domestic debt default related to the repayment of gold-based obligations. Some consider President Nixon's decision refusal in 1971 to redeem dollars for gold to constitute a partial default, while the U.S. was said to default on some Treasury bills in 1979.

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Comments

[Russ 62]

Agreed

[B Reich]

Neither Yellen nor the Fed nor the Biden White House can be trusted with the currency or taxpayer debt. Those are the playthings of government.

[hawkeyec]

To my mind the Federal Government has defaulted at least twice. First, it stiffed the soldiers of Washington's army. To be fair, it had no money to pay them, but unpaid is still unpaid. Secondly, although FNMA and FHLMC were technically not federal agencies, they were quasi-public and to my mind should have been supported in times of need. Instead, in 2009 they were taken over by the government and dividends on their preferred stocks were repudiated and suspended until further notice. These stocks were rated AAA because they were considered to have contingency support from the Treasury. These stocks were critical because they could be held by banks in support of the requirements of the Community Reinvestment Act (CRE). This capability was really critical to smaller community banks who couldn't make enough loans in their communities. The dividends from these preferred stocks was a critical source of incomes as well. The dividends disappeared and the price of the stocks fell from roughly par to $1.25, destroying $20 bil in value and a huge amount of capital for the community banks involved. Personally, I lost a third of my income. Technically, this might not have been considered a default, but it sure felt like one. Those dividends are non-cumulative and still suspended.

[Gorbag]

@hawkeyec More than twice. Let's not forget stiffing the public when gold and silver notes were no longer redeemable as gold or silver. Fiat currency has the same intrinsic value as cryptocurrency: it's based on the "greater fool" theory of value.

[denoverenes7]

I, for one, want EVERYTHING on the table, including Social Security. Medicare, Defense and tax increases. If people are serious about wanting to have a balanced budget, then put EVRYTHING on the table. If people have to work longer in the rat race to be eligible for Social Security and Medicare, so be it. If peoples' taxes have to go up, so be it. If you are serious about this, it can't be "either/or". And yes, government spending has a multiplier effect on the economy too. Farmers and grocery stores won't like to see SNAP benefits cut (nor will businesses they frequent). Employees of, for example, Cincinnati Electronics won't like defense spending being cut (nor will the businesses they frequent). EVERYTHING should be on the table. AND do it through the regular budget and appropriation process, NOT by crashing the economy by defaulting on your bills. Donald Trump begged Schumer and Pelosi to raise the debt ceiling when he was President. Now he says if you have to default, then default, because, he says, he is not now President. And why is that? Moodys says defaulting on the debt will will put 7 million out of work and knock back Americans for generations. One can always point to spending program here or there and say cut that. But in the big scheme of things, doing that won't make as big a difference as claimed. Stop playing politics, put EVERYTHING on the table and do it through the regular budgetary process, not by defaulting on paying the bills on debt incurred. There is no reason not to do it the right way by putting EVERYTHING on the table AND going through the regular budgetary process, rather than defaulting on our debts.

[PeacanPie]

@denoverenes7 Absolutely true, don't forget disability. I know so many people (living in homes that cost $1+ million, they have sail boats, and play golf everyday) getting disability who shouldn't be getting it. They used lawyers, and of course the legal profession will be dead against touching this. One neighbor showed us his disability back payment over $80,000.00 and he now gets a monthly disability check. He also got his 3 kids college written off. While my husband and I paid over $600,000.00 to send our 3 kids to college. We followed the rules. They followed the lawyer.

[Truth in Tension]

While most of the commenters below all want the party to continue, as they all seem to believe that the laws of economics do not apply to the federal government's big spending addiction. Unfortunately, for the non-thinking zeros, the laws of economics do apply to the USA and the federal leviathan.

This can clearly be seen by the increasing inflation, and the fact that more and more countries are discontinuing the use of the US petrodollar for commercial trade of goods between countries. The fact is the petrodollar that has been a tremendous benefit to America is rapidly being discontinued which will significantly increase the cost of everything to both the federal government and US consumers.

The non-thinking zeros seem to believe that money backed by nothing, other then the good faith of a spendthrift sociopathic government that currently has a communist ideology is somehow beneficial to a nation that refuses to secure its borders and is being invaded by millions of uninvited low IQ, low trust, low skill people who do not share with America a common culture, identity, language, history, religious belief or understand the precepts of the constitution. The cost for this folly with be extreme!

The spendthrift federal government will begin to significantly reduce spending in the not to distant future, not because it will somehow become responsible, but because a significant number of countries that have approximately 56% of the worlds population, and who actually produce and sell that majority of physical usable goods, have concluded they no longer trust the sociopaths managing the federal government, and they are tired of being threatened with sanctions, removal from the SWIFT system, confiscation of their property and possibly being attacked by US / NATO forces.

So, as the petrodollar is replaced by bilateral trade between countries using their own currencies, gold and commodities, the irresponsible spendthrift ways of the federal government will come to and end, slowly at first, and then quickly, which will force a significant reduction in the size of the federal leviathan demonstrating for even the non-thinking zeros to see, that the laws of economics do in fact apply even to a communist / Rothschilds fiat money system based on nothing and to the federal leviathan. Who is $ John Galt?

[djoslyn]

Invoking the 14th Amendment is not an emergency measure. Why would SA say it is, in their survey? It’s quite clear that the 14th says the US must and will pay its bills - no excuses. It doesn’t say pay your bills depending on whether or not you like the president, or because you don’t like how much you spent and are suffering buyers remorse. It says we pay our bills, full faith and credit, full stop. It’s also clear that everyone in Congress swore to work within and support the Constitution. Argue over the budget. Not over whether we are a deadbeat nation bent on flouting the Constitution. We invoke the Constitution all the time for various reasons. As we should. It’s not an emergency measure to say we operate constitutionally.

[Eponymous One]

@djoslyn

Thanks for saving me some rushed after the bell keystrokes..

What HE said!

[Djreef1966]

How the hell did we get here?

[3carmonte]

@Djreef1966 The Bush's, O'Bama, and Biden for spending and Trump for tax cuts. Personally, I fault Trump the least. Clinton defunded our Military to offset the debt from Lyndon Johnson's Vietnam/Great Society fiasco. History just is. No editorials are allowed, although some would just like to delete it like a rear windscreen wiper...🤣

[surfgeezer]

@3carmonte Revisionist history-again.
The huge spiral of current deficits started in the 80's- under Reagan. I voted for HW Bush and fully agreed with his assessment of Reagan's taxation policies ( "smoke and mirrors" ) AND his decision to raise taxes to pay for Iraq1- despite saying earlier ( before Sadam unexpectedly attacked Kuwait ) that he wouldn't.
Americans chose Clinton after Reagan's idiocy of "trickle-down paying for itself" and you can clearly see he reduced the rate of expansion.
Repugs have continued to choose whoever promises to NOT pay for what we are spending- INCLUDING the current crop of nitwits that are TRYING for default- so they can "modify" the ALREADY agreed BIPARTISAN spending plan from the LAST Congress, INSTEAD of doing what they were elected for-the FUTRE budgets they NOW should/but can't ACTUALLY write!

Try going to a source that is factual
fiscaldata.treasury.gov/...

If you don't want to read the facts, there is a clear graph of ACTUAL history!

[Reitvestor]

@Djreef1966 The debt tripled under Reagan from $1T after Carter to plus $4T after Reagan. Under Trump it went up several trillion ($2T to $3T) because of the pandemic and tax cuts. Under the Bush's more was added, maybe $6T. Under Clinton, about $3T was added. Using the term 'Under' means congress is responsible.

[VoiceofSanitySometimes]

The Dems want federal spending to continue as is (a "clean" debt ceiling bill)
The Repubs want $120 billion in "cuts" (most of which is reductions in spending growth) attached to the debt ceiling bill

That $120 billion is less than 3% of annual federal spending. So the Dems and the Repubs in DC agree on more than 97% of the budget, and only disagree on the last 3%. For those who are (or were) married, I am quite certain you never fully agree(d) with your spouse on 97% of your home budget.

The pols and the media want us to hate each other over the 3% disagreement. Whichever political side you are on, its the "other side" that is the reason for the 3% disagreement, and if they are given what they want the entire world will end, right?

Puh-leez.

Just relax. Go coach a youth baseball game. Go to your local elementary school and read to the kids. Go tutor some kids in math or science. Go raise money for the local youth swim team.

Stop getting sucked into turning molehills into mountains. With a 3% disagreement, this isn't even a molehill. If the rest of us just ignored this and didn't let the pols and the media turn this into an audience- / fund-raising issue, they'd solve it with a 5 minute phone call.

[surfgeezer]

@VoiceofSanitySometimes while I do like most of your hopeful sentiment and advice, I don't agree we can just ignore it or not stay actively engaged.

Short-term Treasury yields are already spiking with this idiocy.

It is NOT " The Repubs want $120 billion in "cuts" (most of which is reductions in spending growth) attached to the debt ceiling bill" because your statement ignores the FACT that
"cuts" are to an ALREADY passed and agreed on a BIPARTISAN spending bill and ignores the Repbus ARE in charge of the House NOW and CAN change the future course of spending!

It is also not about "only a 3%" disagreement given what the Republicans have proposed and said they will NOT cut on is way over half the agreed spending!

This is about A- is ok to threaten ( again ) to not pay the creditors and destroy the country's credit rating ( which costs HUGE amounts in Interest expenses ) because NOW you don't like what you AGREED to in the past.
B-it will completely shift where the already agreed spending goes to.
C- it is a small minority INSIDE the Republican party itself that is this stupid- so the proposal and already high costs from it needs to be pointed out to the majority of people that are appalled by it.

and D- because a Democracy NEEDS people to be involved and contact their Representatives!

The sad reality is people choose the media they agree with, so I recognize both the profit motive of the media companies and the dysfunction in the electorate that causes.
It is in public forums that the relatively small group of people who are willing to change their minds with the facts can be swayed.

We are at a critical time, much like the debates at our founding and pre-Civil War that centered on the role of our Government, IMO.
Tories vs Revolutionaries before, Federalists and Anti-Federalists after the Revolution, State Rights Democrats vs Federal Rights Republican pre Civil War.
In the 17th and 18th centuries, it was called "Enlightenment" ( advocated secular Religion, personal liberty, and scientific advancement ) vs the " Counter-Enlightenment" that is best described as keeping the status quo of old. Now the terms "Awakened" vs "MAGA" are used- but it is the same discussion/fight.

Debates and compromise are what Democracy is founded on, it depends on US.

[Djreef1966]

@VoiceofSanitySometimes not the way my wife spends money.

[surfgeezer]

@Djreef1966 Unfortunately the question is not whether or not you agree with her spending, but rather do you think it's smart to not pay the bills and destroy the credit rating for both of you to make the point?

[spokano]

I sold equities in late April during the sideways top that we saw. I bought long dated puts then when iv was low and bought long dated calls on GLD. I’m mindful of the last time republicans pulled this crap so I now have a lot of dry powder for use someday. I expect my options to give me more dry powder.

[duggar]

But...but...according to Modern Monetary Theory, so beloved by politicians seeking to bribe voters, the U.S. _can't_ default on its debt, it just has to print more dollar$. There's _plenty_ of money to fund everything we might want; it just hasn't been printed yet, so...this whole argument is moot, right? The "debt ceiling" seems to serve no useful purpose beyond giving politicians yet another cudgel with which to beat each other over the head and scare a mostly ignorant public into voting for one or the other political party according to which is seen to provide the most "free chit."

[surfgeezer]

@duggar um no. We ( politicians ) can CHOOSE to default, which is FAR different than NEEDING to default.

I would also add there IS always a "cost" to debt. We DO still pay Interest and that Interest still "crowds out" other uses of taxpayer money- including those that would in fact increase the GDP and thus taxes coming in.

The other very REAL "cost" is in fact the "Relative Value" of our currency- not very well shown in MMT. The mechanics of this is when other Countries buy our debt it "crowds out" our ability to export "goods and services" and thus also hurts GDP growth.

What the current extremist Republicans are not getting is by defaulting we will DEFINITELY have a large impact on inflation because we do import so much. Just sad stupidity for the party that DOES have "control of the purse", by being in the Majority in the House, to ALSO be saying they won't be paying old bills.

[ALLCTT]

who spends the most money, Demo or Republic?

[surfgeezer]

@ALLCTT LOL- you do get a "deficits" DEFINITION means that it can come from EITHER side of the ledger! "Spending" is only half the equation! More ridiculous framing of a question-as usual.

[ALLCTT]

@surfgeezer Spending is only half the equation then what about the another half of the equation?

[Reflect]

@ALLCTT The answer is yes

[VoiceofSanitySometimes]

All Kabuki theatre.

Don't know why people take this so seriously and personally.

They are bickering over about $100 billion, or about 2% of the federal budget. And none of that is actually "cuts", but reductions in spending growth.

One side says a $1.5 trillion deficit is OK, the other says "no, it has to be $1.6 trillion". Puh-leez.

In the meantime, the pols and media get people to hate each other over it, and to focus there instead of the real issues in this country and in the world.

The world isn't going to end however it turns out, but the next month will be spent convincing you it will.

[diadochi]

@VoiceofSanitySometimes I do like the way you boiled it down. I hope the IRS uses its new funding to implement AI in dealing with tax returns to drive the 1 trillion dollars in estimated tax fraud to zero. (It will happen sooner or later, just as the IRS started using computers back in the day.). Then we're only dealing with 0.6 or .5 of a trillion! (Still a very large number.)

[surfgeezer]

@VoiceofSanitySometimes You are delusional if you think defaulting on the debt will not have serious consequences. Try not paying your bills and see what happens to your interest costs. If you think inflation is bad now try paying for imports with a seriously devalued US dollar.

You are correct in it is theater, but the theater is pretending the Republicans do not have control of the House - which is defined in the Constitution to have the sole power to initiate Revenue Bills- AKA future budgets, WHILE the "Debt limit" IS about actually paying those bills ALREADY accumulated!

[vxmike]

@diadochi how are they going to drive tax fraud to zero? Much of the fraud isn’t discernible on tax returns.

[denoverenes7]

I don't believe we will default. The economy would crash, resulting in the Republicans being wiped out in next year's elections. Why? Because Congress does none of this drama when a Republican is in the White House. It only happens when the Republicans control the House AND a Democrat is in the White House. The Republicans never do this when they control the House with a Republican in the White House. I know that. Everybody knows that. Consequently, as I said, the Republicans would be wiped out next year.

I look for at least 5 Republican House members in districts won by Biden in 2020 to vote with all the House Democrats to raise the debt ceiling.

I'd love to see spending cut. BUT do it through the regular appropriations process. The debt ceiling is simply to allow the U.S. to pay off its debts. It is NOT new spending. I'd love to be able to tell my creditors to Fk Off and that I'm not going to pay off my credit card bills. Then they would take me to Court, which would not be good for me.

[User 31614085]

@denoverenes7 since 1978..the debt ceiling has been raised 61 times. 29 times the bill has been "clean"..32 times there have been other conditions attached..so the idea that the R's are now acting out of the ordinary is incorrect. Having said that..I agree the time to start holding the D's feet to the fire on spending is probably during the upcoming budget negotiations..which of course will lead to a whole "government shut-down" drama...

[denoverenes7]

@MJL987 Let the government shut down. A debt default would crash the economy, putting millions out of work. The Republicans are acting like terrorists. And that is VERY irresponsible on their part. Should we default, it will be "Good Bye GOP" next year.

[User 31614085]

@denoverenes7 the R's have passed a bill which raises the debt limit..the D's don't like the conditions attached. Was the party who demanded the conditions added to the previous debt limit increases (32 instances) also "terrorists" in your mind??

[racerkeith]

Hey! I know, instead of raising the ceiling, how about the FedERAL GOVERNMENT CUT pork barrel spending, propping up unfriendly regimes and life long entitlements for politicians????

[RSI Raistlin]

@racerkeith So I agree in principal. However, reality isnt grounded in ideals. Pork barrel spending sucks but it allows for cooperation. You scratch my back I scratch yours. Plus at some point just about every location has benefit from spending.
In terms of propping up regimes, economics allows us to get concessions in regions where we otherwise have little reach. Kissinger wrote a book called Diplomacy in which he lays out a logical case where down and dirty politics and American ideals clash, but are necessary. As to lifelong politician benefits, yes cancel them, but that is like .00000001 % of a deficit.

[diadochi]

@racerkeith You really need to figure out how things work. The Fed doesn't get to allocate money. That's Congress. Just a gentle reminder to maybe do a bit of coming up to speed.

[surfgeezer]

@racerkeith LOL- you do realize the "Fed" has ZERO to do with how much POLITICIANS ( OUR Representatives ) spend AND tax.

[22023171]

You want to slow down the economy cut federal spending 20% accross the board. That will balance the budget and get rid of inflation in the process. The Fed could even cut interest rates to ease the pain and pick up domestic hiring to help make up some of the difference.

[VoiceofSanitySometimes]

@22023171

Ready to take a 20% cut in your social security payments and medicare benefits?

Those two make up about half of the federal budget.

[diadochi]

@VoiceofSanitySometimes Of course not. He's talking about other people.

[22023171]

@diadochi Actually I am not receiving Medicare or Social Security benefits though they do come out of my check and yes I am ok with those being axed by 20% for the time being.

[BWAHAHAHAHAHA]

Depends on who is in office. Sad.

[Chancer]

Instead of good faith negotiations for a resolution, Biden and Dems seeking tricks (legal or illegal) to FORCE having their own way.
Typical expected Dem behavior- just like Biden with no diplomacy to stop the Ukraine war.

[jmouw12]

@Chancer Why should they compromise? Congress already passed a budget, and it needs to be honored. Democrats never played this game when Trump was in office.

It is entirely inappropriate for Republicans to use this tactic to force their priorities. Republicans can instead push their priorities during budget negotiations, the proper place to do so.

[Chancer]

@jmouw12
I consider Dems inappropriate to use justice agencies of Federal gov't. to fight political battles against ANY opponent (e.g. GOP).

Therefore, OK with me for Dem opponents to fight back any way they wish.

And if Dems do not want to compromise, OK with me to keep gov't. shutdown to end of Biden's term whether this one or the next one.

If that damages the economy, IMO, it does not much matter, as Democrat plans for a commie Democrat dictatorship will destroy the US anyway.

[jmouw12]

@Chancer You clearly don't believe in any principal regarding "good faith".

When people with your disposition and disregard for reality occupy much of the republican side of government, there is no negotiation. This is hostage taking. Reasonable individuals capable of negotiation have been driven from the republican party, self inclusive, by people like you.

[veebee13]

Balance the stupid budget!

[surfgeezer]

@veebee13 Jeez, this is a biz site. The proper use of debt is a given as a positive to financial results. We STARTED this country by "borrowing".

Debt is a tool- nothing more or less.

[JRocks]

@surfgeezer
Accumulating debt to fight off the Brits or build a navy is a lot different than accumulating debt to buy votes.

[surfgeezer]

@JRocks LOL- like tax cuts to "buy votes" is a good idea?
Especially when mostly allocated to people and Corporations that can easily be proven to ALREADY huge "economy of scale" advantages to wage earners.

Again- I am a long-term thinking Capitalists that has zero problems using leverage to increase my net cash flow!

Saying that is why I think "bottom up" is a far superior allocation of Capital than "Trickle down".
In no small part because of the very real currency FX changes that US debt ALSO incurs.

[Reitvestor]

Does anyone remember (1980's) the $4,000 hand tool paid by the taxpayers (or added to the deficit) used on the B-52 that only cost $3 dollars to make? Just an example of the massive defense spending corruption and why future U.S. generations are screwed!

[scottm1207]

@Reitvestor I had a friend in the 1980’s who worked for a government contractor who explained why items cost so much because of working with the ridiculous Fed bureaucratic to get items approved and acquired for even simple things. The hoops they had to jump through and the costs incurred by the companies to wade through the morass of regulations and appropriations rules made costs and prices astronomical.

[GMan31]

The House bill passed raises the debt ceiling by $1.5T. It does NOT require spending cuts, but rather requires reduction of the humongous spending increases built into the 2022 year-end Omnibus bill.

[scottm1207]

@GMan31 Only in government is a failure to increase a budget considered a “cut” by bureaucrats and the media.

[PanicFirst]

@scottm1207 government bureaucrats and media are one in the same. They must protect government.

[surfgeezer]

@GMan31 Because we have zero inflation?
and to be clear the 2022 bill WAS bi partisan- with Republican votes. We are already well into 2023- so by definition it IS a cut from current spending.

Also, unlike the ACTUAL passed 2022 bill, the current Repub does NOT define where to cut precisely SO they can say "we didn't mean that" on what WILL have to be cut. The math however is inescapable and more importantly, it simply is dumb to threaten the "good faith and credit" of the US to try and UNDO a bipartisan spending bill.

The Republicans have the House, they do control the NEW budget- what they are trying to do is rescind what is already passed and, unlike the Trump tax cuts, does "pay" for itself. It fools no one but the few loud extremists on the right.