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For those more knowledgeable than me: How would it play out if the Treasury decided to ignore the debt-ceiling outright, and continue to service the national d

For those more knowledgeable than me: How would it play out if the Treasury decided to ignore the debt-ceiling outright, and continue to service the national debt? Imagine a policy that says, "In accordance with the Fourteenth Amendment, we will continue to pay bondholders their due monies" or something like that. I don't think the 14th amendment gives the Treasury that power, but that's not what I'm asking. Imagine they decide to interpret it that way. The Supreme Court rules against them. They ignore the Court and continue to pay. What happens then? I guess what I'm getting at is: what is worse, a Constitutional Crisis? Or a default on our debt? To me it seems like the better outcome would be to ignore the Court altogether on this issue. (I'm sure I'm making naive assumptions in this questions. Let me know!)

User23 3y ago
The answer is already in the submission. They would gladly facilitate an option the Treasury pursues in its role as fiscal agent, since they can always claim that it was the Treasury’s decision and they had no other option as fiscal agent (which happens to be true). The end result is the Federal Reserve would be forced to follow its unwritten 0th commandment: maintain the integrity of the payments system. As a consequence of that imperative it would be operationally forced to continue to ensure Treasury auctions and payments continued to go through. Presumably accounting gimmicks would be employed to avoid “technically” exceeding the debt ceiling, like simply allowing Treasury to overdraw. But at the end of the day there would be no constitutional crisis. At least not a forced one. Of course we shouldn’t underestimate the power of stupidity so it can’t be ruled out entirely.
- JumpCrisscross 3y ago
  > it would be operationally forced to continue to ensure Treasury auctions and payments continued to go through The Fed can't buy debt directly from the Treasury [1]. [1] https://www.federalreserve.gov/faqs/money_12851.htm https://www.federalreserve.gov/faqs/money_12851.htm
  - User23 3y ago
    Sure there’s the primary dealer figleaf/kickback. Operationally though the Fed is just buying government debt with an extra step. Also the Fed can just let Treasury run negative balances or any other number of accounting tricks.
candiddevmike 3y ago
Capital will never let either scenario occur. It's all just theatre. The US will never default on debt, it's a convenient negotiation tactic to waterdown more progressive legislation. Just like how there's always 1-2 democrats that just can't get behind progressive legislation.
- function_seven 3y ago
  Yeah, I'm asking a hypothetical to see where it goes. Lots of things that would "never happen" seem to be happening, so I wouldn't be too sure of it. So, Treasury decides to punch through the debt ceiling. What happens next?
- joelthelion 3y ago
  > Capital will never let either scenario occur. It's all just theatre. The US will never default on debt, it's a convenient negotiation tactic That's true until it isn't. I hope you're right, but I worry that you're probably overestimating our politicians. They're not all playing 5D poker. Some are just plain stupid.
  - Eji1700 3y ago
    Yep. Maybe when this started it was theater, but more and more i'm wondering if we've got enough idiots who think they stand to gain from something like this. It won't be some shadowy cabal of actors trying to overthrow things, it'll just be a bunch of headline hunting lunatics who can't think past the next hour.
    - ryandrake 3y ago
      Yea it would be great if it was just stupidity, but we have elected officials actively working to sabotage and undermine the government and economy. Our system of checks and balances didn’t really account for what happens when a sizable minority in government are bent in destroying it.
      - 3y ago
sanderjd 3y ago
This is why the Supreme Court wouldn't rule against this. It's a game of chicken, but it's very important to the Court to never make a decision that simply can't be executed by the elected branches. And the individual human beings on the Court know this and enough of them would find some rationalization they could live with to avoid such a ruling.
- function_seven 3y ago
  I think you're right. If I'm sitting on the court, I might accept whatever flimsy loophole the Executive Branch provides, and say, "Congress is free to clarify their intentions at any time to resolve this impasse". Now the ball is in the House's court. Are they going to vote to positively default? (Rather than passively not act before some deadline, like how they do it now?) I bet not.
  - fnordpiglet 3y ago
    Given the 14th amendment exists and its purpose was in fact to assure the treasury would always pay its debts and the constitution overrides any law, it wouldn’t be a very flimsy loophole to say congress would need to clarify possible up to and including an amendment. The debt ceiling isn’t specifically about paying debts but about authorizing new borrowing. So while the treasury may not be able to legally issue debt to pay existing debt, it would be required to pay debt. This is of course the starve the beast goal of the debt ceiling to force spending cuts to pay the debt by making the debt payment so vast that the federal government would become a shadow of itself in that eventuality. However since the law has never been contested it’s not clear it would work. But the treasury of course has many other ways of paying debts, including simply issuing currency. Even if the 14th amendment doesn’t invalidate the debt ceiling, the treasury still must pay the debts, and doesn’t have to do so by cutting spending. It would however be more orderly and strictly better for everyone if the 14th amendment did invalidate the debt ceiling in a situation that questioned the treasuries ability to make whole debts without resorting to disruptive measures.
    - immibis 3y ago
HDThoreaun 3y ago
The justices put a ton of effort into maintaining the courts legitimacy. A large part of that is not making decisions that the vast majority of the country disagrees with, even if there's no real legal reason to do so. I think this would be one of those situations.
- eli 3y ago
  Some of the justices seem to care somewhat about what people think of them. Some don't seem to care much at all. In general I don't agree that the court puts that much effort into appearing legitimate.
- callalex 3y ago
  If the Supreme Court cared at all about appearing legitimate, they would have made the effort to remove Justice Thomas, who keeps taking outright bribes in order to influence his decisions, and the public is completely aware of it with documented proof.
  - Eji1700 3y ago
    You have very different definitions of "the public" and I promise you that yours is a hell of a lot smaller. People who are aware of who Justice Thomas even IS would still be a vastly smaller circle than the number of people who would be affected and have very strong opinions on a US default (although not until it happens).
    - dragonwriter 3y ago
      Most people (and more than is the case for any other Supreme Court Justice) know who Thomas is, and most of those (by a wider absolute than any other justice, though by a smaller relative margine than Kavanaugh or Barrett) who do have negative impression of him. https://thehill.com/homenews/4019788-poll-thomas-has-highest-unfavorability-on-supreme-court/ https://thehill.com/homenews/4019788-poll-thomas-has-highest...
  - niceice 3y ago
    Missing context: Supreme Court Justice Clarence Thomas has been friends with Dallas billionaire Harlan Crow for 27 years. Crow said that he and his wife have been friends with Thomas and his wife Ginni since 1996. Is there proof they were bribes as opposed to the innocent explanation that they are just family friends, and it's not unusual for billionaires to offer a free ride to their non-billionaire friends on vacation?
PeterisP 3y ago
For starters, the supreme court would not do anything until (unless!) someone challenges the treasury ruling, and there would inevitably be some nontrivial time gap between the two sentences in your scenario of "Imagine they decide to interpret it that way. The Supreme Court rules against them." during which they would pay out the funds. But after a binding ruling is issued, I'd assume there would be personal sanctions, liability and likely criminal charges against any individuals involved in defying that decision.
- idontpost 3y ago
  [dead]
- eli 3y ago
  That seems like a dodge. There is always someone willing to challenge anything the federal government does. It would be entirely up to the Court how quickly they'd want to hear the case. It could be immediate if they want.
- ndriscoll 3y ago
  > I'd assume there would be personal sanctions, liability and likely criminal charges against any individuals involved in defying that decision. The president would almost certainly not want to take responsibility for the resulting economic implosion, and would order the executive to ignore the court ruling. Then it comes down to a mix of loyalties and individuals' beliefs around what would cause the least damage. It's far more likely that a ruling like that would be the end of the court's power.
  - ProjectArcturis 3y ago
    Yes, in practice a ruling like this might remind everyone that there is no clause in the Constitution giving the Supreme Court the power to review the other branches' actions. They grabbed that power themselves in Marbury v Madison.
- wolverine876 3y ago
  > But after a binding ruling is issued, I'd assume there would be personal sanctions, liability and likely criminal charges against any individuals involved in defying that decision. That's not accurate: Power in the US government is of course separated between the legislative, executive, and judicial branches, and each has checks and balances on the other two. One check the executive has on the judicial is to ignore its rulings. The executive can't do it all the time, obviously, and afaik the US also generally embraces 'judicial supremacy', the idea that the judicial branch generally gets the last word. Also, I don't recall the judiciary sanctioning indiviuals in the executive branch, but I could be wrong [Edit: of course I'm wrong, see below]. I would guess they've never sanctioned a president. Perhaps the most famous use of this power was in Worcester v. Georgia; when his favored side lost the case, President Andrew Jackson reputedly said, "[Chief Justice] John Marshall has made his decision; now let him enforce it." (Inspiring rhetoric, but it led eventually to Native Americans having their land stolen and many being marched to their deaths.)
bbsm_777 3y ago
I think the Supreme Court might rule that the new debt issued when the debt ceiling was exceeded was not valid. The most likely way this could happen is if a new administration refused to pay the obligations due on bonds issued in excess to government appropriations. Typically the 14th amendment would actually be seen as requiring the payment of this debt, but if someone challenged the non-payment the Supreme Court could rule the debt was not issued in compliance with law.
jfengel 3y ago
There is an additional player, the Federal Reserve. The Treasury can write a check, but that check is to be drawn against an account in an actual bank -- ordinary commercial banks. Those banks have to follow the rules of banking and can't just honor checks because they're the government. So in the scenario you describe, the Treasury writes checks, and they bounce. That would be... bad. The Treasury would have to collude with the Fed. Something like, the Treasury sells some bonds to the Fed, and the Fed buys them, putting the money into the Fed account. That's illegal, because Congress didn't authorize it, and they try to put the Treasury secretary in jail. The Supreme Court says "We have no idea what's going on, this is up to you jackasses. Go legislate something." A whole bunch of stuff happens, but it all comes down to DC in flames and the country gives up.
- JumpCrisscross 3y ago
  > Treasury can write a check, but that check is to be drawn against an account in an actual bank -- ordinary commercial banks The Treasury banks with commercial banks, but it also has an account at Fed. That said, banks aren't legally obligated to accept its cheques. > an additional player, the Federal Reserve That's what this memo describes [1]. In essence, the Fed says it will defer to the Treasury on whether debt is legally issued. > Treasury sells some bonds to the Fed The Fed can't do that [2]. What they can do is announce to the market that they won't treat post-ceiling debt differently from pre-ceiling debt. That's what this memo says. It may not be able to continue doing that if e.g. SCOTUS rules Treasury exceeded its authority. But at that point, the Treasury could start testing its minting power. In summary, the Fed isn't a player in the legal part of this game. [1] https://www.federalreserve.gov/monetarypolicy/files/FOMC20110719memo01.pdf https://www.federalreserve.gov/monetarypolicy/files/FOMC2011... [2] https://www.federalreserve.gov/faqs/money_12851.htm https://www.federalreserve.gov/faqs/money_12851.htm
- function_seven 3y ago
  This is a piece I was missing in my hypothesizing. It didn't even occur to me that Treasury needs the Fed in order to transact in this way. I kept thinking about the Fed doing maneuvers as "one possible path", and the Treasury doing maneuvers as "another path", but they're kinda the same. Thanks.
pdonis 3y ago
> How would it play out if the Treasury decided to ignore the debt-ceiling outright, and continue to service the national debt? As the article notes, the Treasury already does things to circumvent the debt ceiling, and nobody cares. The article is just discussing further things that the Fed could do to help the Treasury circumvent the debt ceiling if necessary. In other words, I don't think the debt ceiling issue will ever trigger a Constitutional crisis. (Unless, of course, you think, not unreasonably, that all this circumventing of laws passed by Congress already is such a crisis, but that's a whole other discussion.)
- JumpCrisscross 3y ago
  > article is just discussing further things that the Fed could do to help the Treasury circumvent the debt ceiling if necessary Not even that. The Fed is saying they'll defer to the Treasury on whether debt is legally issued. (Presumably, until SCOTUS rules on it.)
  - pdonis 3y ago
    > The Fed is saying they'll defer to the Treasury on whether debt is legally issued. Yes, while the Fed continues to do various things behind the scenes to make sure that the Treasury can plausibly claim that the debt is legally issued.
    - JumpCrisscross 3y ago
      > while the Fed continues to do various things behind the scenes to make sure that the Treasury can plausibly claim that the debt is legally issued What are you hinting at? The Fed doesn't decide on whether debt is legally issued. It also cannot overrule Treasury absent a court order. It's saying that, absent court advice, if the Treasury issues debt it will treat it like any other. There is nothing behind the scenes they need to do beyond announcing they'll treat them equivalently.
      - pdonis 3y ago
        > What are you hinting at? I'm just restating what was in the article, for example when it talks about "accounting gimmicks" that the Treasury uses to circumvent the debt ceiling. The Fed, as you say, cannot overrule Treasury, so if the Treasury tells the Fed to play a particular role in its accounting gimmicks (which it does), the Fed has no choice but to do so.
blake1 3y ago
The treasury would auction off securities—probably short term bills—in excess of the debt ceiling. I am confident that this auction would succeed, in that dealers would be happy to bid, possibly at high yield. The settlement process following this auction has the Treasury and the dealers both sending out instructions on FedWire to transfer the bill to the dealer and the cash to the Treasury account. The Fed’s conundrum is: do they possibly break the law, or do they certainly destroy the economy? I am supremely confident they will not destroy the economy. They’ve done gray-area actions to prevent economic catastrophe before. So the settlement will take place, Treasury will have cash, and everyone’s happy. Then what? A lawsuit I presume, but who would sue the Treasury, and under legal theory? Not a lawyer, but I think you need to show injury to have standing to bring a case. But a case of this magnitude would be decided on political calculations as much as legal principles, and I cannot imagine the Supreme Court wants to be the party clearly responsible for world economic chaos. And what kind of order could the Supreme Court issue? It would be weeks after the fact—maybe months. Some sort of unwind of the treasury auction, where the dealers put the bills back. (The bills might be expired though.) That would not solve a damn thing, because of the debt ceiling: there will be no money, and no way to raise any, to return to the dealers. I cannot overstate how damaging any such attempt to take back debt would be. This is similar to the collapse of a big bank or exchange, but orders of magnitude more so. So since there really is not an effective legal remedy available to the court, why would they issue such an impossibility? I think the court will find a way to make the administration look bad, sure, but why would any court force a constitutional crisis? They are in a sense the weakest branch, especially in an emergency situation.
InTheArena 3y ago
Ironically, I am 100% convinced that the Dobbs decision may be what finally returns the US government to sanity. Saying that abortion is a political decision that the states should decide for themselves and punting it back to the democracy is the right decision. Tonight abortion rights picked up in Ohio - which is something that politicians will have to factor in if they want to be elected - versus just railing against the evil of the other party having the votes in the supreme court, while using abortion as a eternal wedge issue. I think this falls into the same category. Inventing laws out of whole cloth to paper over political division is bad.
seanhunter 3y ago
There's an incredible book called "A free nation deep in debt: The financial roots of democracy"[1] which explores these sorts of questions from a historical perspective and shows the relationship between bond markets and governments. [1] https://www.james-macdonald.net/free-nation-deep-in-debt https://www.james-macdonald.net/free-nation-deep-in-debt

User23 3y ago

The answer is already in the submission. They would gladly facilitate an option the Treasury pursues in its role as fiscal agent, since they can always claim that it was the Treasury’s decision and they had no other option as fiscal agent (which happens to be true). The end result is the Federal Reserve would be forced to follow its unwritten 0th commandment: maintain the integrity of the payments system. As a consequence of that imperative it would be operationally forced to continue to ensure Treasury auctions and payments continued to go through. Presumably accounting gimmicks would be employed to avoid “technically” exceeding the debt ceiling, like simply allowing Treasury to overdraw. But at the end of the day there would be no constitutional crisis. At least not a forced one. Of course we shouldn’t underestimate the power of stupidity so it can’t be ruled out entirely.

JumpCrisscross 3y ago
> it would be operationally forced to continue to ensure Treasury auctions and payments continued to go through The Fed can't buy debt directly from the Treasury [1]. [1] https://www.federalreserve.gov/faqs/money_12851.htm https://www.federalreserve.gov/faqs/money_12851.htm
- User23 3y ago
  Sure there’s the primary dealer figleaf/kickback. Operationally though the Fed is just buying government debt with an extra step. Also the Fed can just let Treasury run negative balances or any other number of accounting tricks.

candiddevmike 3y ago

Capital will never let either scenario occur. It's all just theatre. The US will never default on debt, it's a convenient negotiation tactic to waterdown more progressive legislation. Just like how there's always 1-2 democrats that just can't get behind progressive legislation.

function_seven 3y ago
Yeah, I'm asking a hypothetical to see where it goes. Lots of things that would "never happen" seem to be happening, so I wouldn't be too sure of it. So, Treasury decides to punch through the debt ceiling. What happens next?
joelthelion 3y ago
> Capital will never let either scenario occur. It's all just theatre. The US will never default on debt, it's a convenient negotiation tactic That's true until it isn't. I hope you're right, but I worry that you're probably overestimating our politicians. They're not all playing 5D poker. Some are just plain stupid.
- Eji1700 3y ago
  Yep. Maybe when this started it was theater, but more and more i'm wondering if we've got enough idiots who think they stand to gain from something like this. It won't be some shadowy cabal of actors trying to overthrow things, it'll just be a bunch of headline hunting lunatics who can't think past the next hour.
  - ryandrake 3y ago
    Yea it would be great if it was just stupidity, but we have elected officials actively working to sabotage and undermine the government and economy. Our system of checks and balances didn’t really account for what happens when a sizable minority in government are bent in destroying it.
    - 3y ago

sanderjd 3y ago

This is why the Supreme Court wouldn't rule against this. It's a game of chicken, but it's very important to the Court to never make a decision that simply can't be executed by the elected branches. And the individual human beings on the Court know this and enough of them would find some rationalization they could live with to avoid such a ruling.

function_seven 3y ago
I think you're right. If I'm sitting on the court, I might accept whatever flimsy loophole the Executive Branch provides, and say, "Congress is free to clarify their intentions at any time to resolve this impasse". Now the ball is in the House's court. Are they going to vote to positively default? (Rather than passively not act before some deadline, like how they do it now?) I bet not.
- fnordpiglet 3y ago
  Given the 14th amendment exists and its purpose was in fact to assure the treasury would always pay its debts and the constitution overrides any law, it wouldn’t be a very flimsy loophole to say congress would need to clarify possible up to and including an amendment. The debt ceiling isn’t specifically about paying debts but about authorizing new borrowing. So while the treasury may not be able to legally issue debt to pay existing debt, it would be required to pay debt. This is of course the starve the beast goal of the debt ceiling to force spending cuts to pay the debt by making the debt payment so vast that the federal government would become a shadow of itself in that eventuality. However since the law has never been contested it’s not clear it would work. But the treasury of course has many other ways of paying debts, including simply issuing currency. Even if the 14th amendment doesn’t invalidate the debt ceiling, the treasury still must pay the debts, and doesn’t have to do so by cutting spending. It would however be more orderly and strictly better for everyone if the 14th amendment did invalidate the debt ceiling in a situation that questioned the treasuries ability to make whole debts without resorting to disruptive measures.
  - immibis 3y ago

HDThoreaun 3y ago

The justices put a ton of effort into maintaining the courts legitimacy. A large part of that is not making decisions that the vast majority of the country disagrees with, even if there's no real legal reason to do so. I think this would be one of those situations.

eli 3y ago
Some of the justices seem to care somewhat about what people think of them. Some don't seem to care much at all. In general I don't agree that the court puts that much effort into appearing legitimate.
callalex 3y ago
If the Supreme Court cared at all about appearing legitimate, they would have made the effort to remove Justice Thomas, who keeps taking outright bribes in order to influence his decisions, and the public is completely aware of it with documented proof.
- Eji1700 3y ago
  You have very different definitions of "the public" and I promise you that yours is a hell of a lot smaller. People who are aware of who Justice Thomas even IS would still be a vastly smaller circle than the number of people who would be affected and have very strong opinions on a US default (although not until it happens).
  - dragonwriter 3y ago
    Most people (and more than is the case for any other Supreme Court Justice) know who Thomas is, and most of those (by a wider absolute than any other justice, though by a smaller relative margine than Kavanaugh or Barrett) who do have negative impression of him. https://thehill.com/homenews/4019788-poll-thomas-has-highest-unfavorability-on-supreme-court/ https://thehill.com/homenews/4019788-poll-thomas-has-highest...
- niceice 3y ago
  Missing context: Supreme Court Justice Clarence Thomas has been friends with Dallas billionaire Harlan Crow for 27 years. Crow said that he and his wife have been friends with Thomas and his wife Ginni since 1996. Is there proof they were bribes as opposed to the innocent explanation that they are just family friends, and it's not unusual for billionaires to offer a free ride to their non-billionaire friends on vacation?

PeterisP 3y ago

For starters, the supreme court would not do anything until (unless!) someone challenges the treasury ruling, and there would inevitably be some nontrivial time gap between the two sentences in your scenario of "Imagine they decide to interpret it that way. The Supreme Court rules against them." during which they would pay out the funds. But after a binding ruling is issued, I'd assume there would be personal sanctions, liability and likely criminal charges against any individuals involved in defying that decision.

idontpost 3y ago
[dead]
eli 3y ago
That seems like a dodge. There is always someone willing to challenge anything the federal government does. It would be entirely up to the Court how quickly they'd want to hear the case. It could be immediate if they want.
ndriscoll 3y ago
> I'd assume there would be personal sanctions, liability and likely criminal charges against any individuals involved in defying that decision. The president would almost certainly not want to take responsibility for the resulting economic implosion, and would order the executive to ignore the court ruling. Then it comes down to a mix of loyalties and individuals' beliefs around what would cause the least damage. It's far more likely that a ruling like that would be the end of the court's power.
- ProjectArcturis 3y ago
  Yes, in practice a ruling like this might remind everyone that there is no clause in the Constitution giving the Supreme Court the power to review the other branches' actions. They grabbed that power themselves in Marbury v Madison.
wolverine876 3y ago
> But after a binding ruling is issued, I'd assume there would be personal sanctions, liability and likely criminal charges against any individuals involved in defying that decision. That's not accurate: Power in the US government is of course separated between the legislative, executive, and judicial branches, and each has checks and balances on the other two. One check the executive has on the judicial is to ignore its rulings. The executive can't do it all the time, obviously, and afaik the US also generally embraces 'judicial supremacy', the idea that the judicial branch generally gets the last word. Also, I don't recall the judiciary sanctioning indiviuals in the executive branch, but I could be wrong [Edit: of course I'm wrong, see below]. I would guess they've never sanctioned a president. Perhaps the most famous use of this power was in Worcester v. Georgia; when his favored side lost the case, President Andrew Jackson reputedly said, "[Chief Justice] John Marshall has made his decision; now let him enforce it." (Inspiring rhetoric, but it led eventually to Native Americans having their land stolen and many being marched to their deaths.)

bbsm_777 3y ago

I think the Supreme Court might rule that the new debt issued when the debt ceiling was exceeded was not valid. The most likely way this could happen is if a new administration refused to pay the obligations due on bonds issued in excess to government appropriations. Typically the 14th amendment would actually be seen as requiring the payment of this debt, but if someone challenged the non-payment the Supreme Court could rule the debt was not issued in compliance with law.

jfengel 3y ago

There is an additional player, the Federal Reserve. The Treasury can write a check, but that check is to be drawn against an account in an actual bank -- ordinary commercial banks. Those banks have to follow the rules of banking and can't just honor checks because they're the government. So in the scenario you describe, the Treasury writes checks, and they bounce. That would be... bad. The Treasury would have to collude with the Fed. Something like, the Treasury sells some bonds to the Fed, and the Fed buys them, putting the money into the Fed account. That's illegal, because Congress didn't authorize it, and they try to put the Treasury secretary in jail. The Supreme Court says "We have no idea what's going on, this is up to you jackasses. Go legislate something." A whole bunch of stuff happens, but it all comes down to DC in flames and the country gives up.

JumpCrisscross 3y ago
> Treasury can write a check, but that check is to be drawn against an account in an actual bank -- ordinary commercial banks The Treasury banks with commercial banks, but it also has an account at Fed. That said, banks aren't legally obligated to accept its cheques. > an additional player, the Federal Reserve That's what this memo describes [1]. In essence, the Fed says it will defer to the Treasury on whether debt is legally issued. > Treasury sells some bonds to the Fed The Fed can't do that [2]. What they can do is announce to the market that they won't treat post-ceiling debt differently from pre-ceiling debt. That's what this memo says. It may not be able to continue doing that if e.g. SCOTUS rules Treasury exceeded its authority. But at that point, the Treasury could start testing its minting power. In summary, the Fed isn't a player in the legal part of this game. [1] https://www.federalreserve.gov/monetarypolicy/files/FOMC20110719memo01.pdf https://www.federalreserve.gov/monetarypolicy/files/FOMC2011... [2] https://www.federalreserve.gov/faqs/money_12851.htm https://www.federalreserve.gov/faqs/money_12851.htm
function_seven 3y ago
This is a piece I was missing in my hypothesizing. It didn't even occur to me that Treasury needs the Fed in order to transact in this way. I kept thinking about the Fed doing maneuvers as "one possible path", and the Treasury doing maneuvers as "another path", but they're kinda the same. Thanks.

pdonis 3y ago

> How would it play out if the Treasury decided to ignore the debt-ceiling outright, and continue to service the national debt? As the article notes, the Treasury already does things to circumvent the debt ceiling, and nobody cares. The article is just discussing further things that the Fed could do to help the Treasury circumvent the debt ceiling if necessary. In other words, I don't think the debt ceiling issue will ever trigger a Constitutional crisis. (Unless, of course, you think, not unreasonably, that all this circumventing of laws passed by Congress already is such a crisis, but that's a whole other discussion.)

JumpCrisscross 3y ago
> article is just discussing further things that the Fed could do to help the Treasury circumvent the debt ceiling if necessary Not even that. The Fed is saying they'll defer to the Treasury on whether debt is legally issued. (Presumably, until SCOTUS rules on it.)
- pdonis 3y ago
  > The Fed is saying they'll defer to the Treasury on whether debt is legally issued. Yes, while the Fed continues to do various things behind the scenes to make sure that the Treasury can plausibly claim that the debt is legally issued.
  - JumpCrisscross 3y ago
    > while the Fed continues to do various things behind the scenes to make sure that the Treasury can plausibly claim that the debt is legally issued What are you hinting at? The Fed doesn't decide on whether debt is legally issued. It also cannot overrule Treasury absent a court order. It's saying that, absent court advice, if the Treasury issues debt it will treat it like any other. There is nothing behind the scenes they need to do beyond announcing they'll treat them equivalently.
    - pdonis 3y ago
      > What are you hinting at? I'm just restating what was in the article, for example when it talks about "accounting gimmicks" that the Treasury uses to circumvent the debt ceiling. The Fed, as you say, cannot overrule Treasury, so if the Treasury tells the Fed to play a particular role in its accounting gimmicks (which it does), the Fed has no choice but to do so.

blake1 3y ago

The treasury would auction off securities—probably short term bills—in excess of the debt ceiling. I am confident that this auction would succeed, in that dealers would be happy to bid, possibly at high yield. The settlement process following this auction has the Treasury and the dealers both sending out instructions on FedWire to transfer the bill to the dealer and the cash to the Treasury account. The Fed’s conundrum is: do they possibly break the law, or do they certainly destroy the economy? I am supremely confident they will not destroy the economy. They’ve done gray-area actions to prevent economic catastrophe before. So the settlement will take place, Treasury will have cash, and everyone’s happy. Then what? A lawsuit I presume, but who would sue the Treasury, and under legal theory? Not a lawyer, but I think you need to show injury to have standing to bring a case. But a case of this magnitude would be decided on political calculations as much as legal principles, and I cannot imagine the Supreme Court wants to be the party clearly responsible for world economic chaos. And what kind of order could the Supreme Court issue? It would be weeks after the fact—maybe months. Some sort of unwind of the treasury auction, where the dealers put the bills back. (The bills might be expired though.) That would not solve a damn thing, because of the debt ceiling: there will be no money, and no way to raise any, to return to the dealers. I cannot overstate how damaging any such attempt to take back debt would be. This is similar to the collapse of a big bank or exchange, but orders of magnitude more so. So since there really is not an effective legal remedy available to the court, why would they issue such an impossibility? I think the court will find a way to make the administration look bad, sure, but why would any court force a constitutional crisis? They are in a sense the weakest branch, especially in an emergency situation.

InTheArena 3y ago

Ironically, I am 100% convinced that the Dobbs decision may be what finally returns the US government to sanity. Saying that abortion is a political decision that the states should decide for themselves and punting it back to the democracy is the right decision. Tonight abortion rights picked up in Ohio - which is something that politicians will have to factor in if they want to be elected - versus just railing against the evil of the other party having the votes in the supreme court, while using abortion as a eternal wedge issue. I think this falls into the same category. Inventing laws out of whole cloth to paper over political division is bad.

seanhunter 3y ago

There's an incredible book called "A free nation deep in debt: The financial roots of democracy"[1] which explores these sorts of questions from a historical perspective and shows the relationship between bond markets and governments. [1] https://www.james-macdonald.net/free-nation-deep-in-debt https://www.james-macdonald.net/free-nation-deep-in-debt