The case for breaching the debt ceiling
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Negotiating to raise the debt ceiling is a dangerous game, because there's always the possibility that the negotiations will fail. If they do, the government could continue borrowing regardless — and put the debt ceiling permanently in the rear-view mirror.
Why it matters: President Biden has a constitutional obligation to continue borrowing money to service the outstanding national debt and make other payments mandated by Congress. By allowing the national debt to rise above the level set by the debt ceiling, Biden would be obeying that obligation and effectively preventing all future debt standoffs.
The big picture: The debt ceiling will probably be raised this time around, just as it has been raised every other time it has been reached. But "probably" isn't "certainly," and if you run a debt-ceiling showdown enough times, you will end up with a default eventually.
- JPMorgan analysts this week put out a research note saying that the probability of reaching the X-date had reached 25%. If that's the new normal, then there's an objectively unacceptable 70% chance of some kind 0f debt default over the course of the next four showdowns.
The other side: If the U.S. successfully manages to continue borrowing money and paying its debts even with total debt higher than the mandated ceiling, that could restore its AAA credit rating from Standard & Poor's and entrench its status as the world's preeminent risk-free borrower.
Between the lines: Raising the debt ceiling is a "kick the can down the road" act, just like selling premium bonds or selling gold. It buys time, but it doesn't address the fundamental problem.
- Breaching the debt ceiling, by contrast, is a one-and-done move. Once Treasury proves itself willing and able to borrow more than the debt ceiling, it need never fear the ceiling again.
Where it stands: "The Constitution gives Congress the power to make contracts," write sovereign-debt experts Anna Gelpern, Adam Levitin and Stephen Lubben. "It does not give Congress the power to renege on these contracts."
- "Treasury is bound to pay," they conclude. "If Congress does not raise enough revenue to pay for appropriated commitments, then the president’s only choice is to borrow."
- In other words: The president's constitutional obligation to borrow the money trumps any debt-ceiling obligation not to.
Be smart: "Once the debt ceiling has been reached, anything the president does is illegal," notes international economic strategist Patrick Chovanec.
- A lawsuit alleging the new borrowing was illegal would surely make it to the Supreme Court in record time. But even if the justices were broadly sympathetic to the plaintiff and found against the executive, the remedy would not be to force the U.S. to default on its debt.
The bottom line: Any borrowing above the debt limit would be unauthorized by Congress. But so long as the debt continued to be issued and serviced, markets wouldn't mind. In fact, they would probably welcome a world in which congressional dysfunction no longer threatened the full faith and credit of the United States.
