Rightfully yours

A recent article in POLITICO raised the spectre that it is virtually certain, even among all the bickering in Washington, that the debt limit will be raised so the U.S. can pay its financial obligations, but the nation will lose its top credit rating for the first time in its history.

What really scares the administration is that the nation’s triple-A rating will be downgraded. The downgrade may not be much, maybe to double-A+.

Financial analysts estimate that a downgrade will result in Americans being charged more than $100 billion per year in higher borrowing costs. Interest rates would escalate rapidly on credit cards, mortgages, and car loans.

This would be the equivalent of a large tax increase on Americans, that both parties (they say) are trying to avoid. And, there is no guarantee that there wouldn’t be a tax increase anyway.

How’s that for trickle down economics?

The loss of the triple-A bond rating would force the huge investment funds that are allowed to hold only triple-A investments to sell their holdings as a whole. On a smaller scale, this fire sale will probably cause many smaller investors to dump their holdings as well.

Investors can move their investments to Canada, England, Hong Kong, Singapore, Australia and many other European countries who have the triple-A rating and might be more reliable in delivering safe returns. The United States will no longer be in that club.

The rating agencies are holding their threats high and visible, saying that in addition to raising the debt limit to pay current obligations, they want to see an enforceable agreement to cut $4 trillion from expenses over the next ten years as an assurance that the U.S. is indeed working to get its financial house in order.

An enforceable agreement is tough. Each two-year congressional session is unique with its elected members. Even if a law was passed limiting spending to a certain amount, a future Congress could modify or even repeal it.

Since an overall limit on most federal debt was first set up in 1939, the debt ceiling went up during every presidency with the sole exception of former President Harry S. Truman’s.

Another option that has been discussed in detail is the president invoking the 14^th amendment and raising the debt limit on his own authority if Congress fails its responsibility. 

The 14^th Amendment, Section 4 certifies the debt of the U.S. is irrefutable and it must be paid. It also includes debts for payments of pensions, which would include expenses like Social Security and Medicare, as well as government and military pensions, all validated by Congress.

“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. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.”

“Section 5. The Congress shall have power to enforce, by appropriate legislation, the provisions of this article. “

The Supreme Court in City of Boerne v. Flores (1997) said regarding Section 5:

“Any suggestion that Congress has a substantive, non-remedial power under the Fourteenth Amendment is not supported by our case law.”

That is taken to mean that Congressional action (or inaction) is not absolutely final. That would be true especially if Congress, through inaction, puts the interest of the nation at risk.

Former President Bill Clinton said last week that the 14^th Amendment states the “validity” of government debt ”shall not be questioned” means that Obama could simply ignore the congressionally imposed debt ceiling and go on borrowing.

Obama considered the possibility, but for the present appeared to rule it out. “The Constitution makes clear that Congress has the authority, not the president, to borrow money and only Congress can increase the statutory debt ceiling.”

Article 1, Section 8 of the Constitution states that:

“The Congress shall have power

To lay and collect Taxes, Duties, Imposts and Excises,

To pay the Debts and provide for the common defence and general Welfare of the United States; …

To borrow Money on the credit of the United States; …

The vesting clauses establish the principle of separation of powers by specifically giving to each branch of the federal government only those powers it can exercise and no others. This means that no branch may exercise powers that properly belong to another branch.

The president says he will not bypass Congress and cite an obscure part of the U.S. Constitution to prevent a government debt default. Legal experts say it would prove difficult to challenge him in court should he change his mind.

It wouldn’t be enough for a plaintiff to claim that Obama is overstepping his authority or acting illegally. In order to sue, there has to be an injury in fact. That same standard would apply if someone preemptively filed a lawsuit to stop Obama invoking the 14^th Amendment.

Challengers might argue that relying on the 14^th Amendment to raise the debt ceiling qualified as an abuse of executive power, but it would be extremely difficult for them to show that they suffered specific harm such as lost money, property or rights.

In 1996, President Clinton signed the line-item veto act, allowing the president to veto separate parts of a spending bill. Six members of Congress who opposed the law sued the Treasury secretary and the director of the Office of Management and Budget, claiming the law was an unconstitutional over-reach of executive power.

In 1997, the Supreme Court said the members of Congress did not have qualifications to sue, ruling they did not suffer personal injury or that Congress was harmed.

The 14^th Amendment allows the president to pass the ball to Congress. It states we have to continue to pay our debts. As for social security payments and Medicare, they are contracted pension benefits that also need to be paid.

The Treasury secretary must pay all outstanding debts, and when there is no money left, Congress is obligated to borrow more to meet the obligations under the 14^th Amendment (currently $28 billion per week). Only new debts (like highway and bridge repairs) are off limits.

A third, least likely option is a legal minting trick called coin seigniorage. 

Congress provided the authority, in legislation passed in 1996, for the US Mint to create platinum bullion or proof platinum coins with arbitrarily decreed face values having no relationship to the value of the platinum used in these coins.

The Mint’s profit (coin seigniorage) is the credit provided less the cost of producing these coins. The Treasury will book these profits as miscellaneous revenue in the treasury General Account, the same way as tax revenues. Poof! No need to borrow. Plenty of cash. Mostly worthless.

It follows the same concept as the printing of Federal Reserve notes, which we know as paper money, the fiat currency backed by the “full faith and credit of the United States”.

We are getting too close to the borrowing deadline to use this trick, but we should know that it is available, and used by more than several nations as an ongoing way to finance their operations.

The bottom line is that the president has sworn to uphold both the Constitution, which prohibits default, and the laws of the United States which includes a debt ceiling. The Constitution is the final authority of law and trumps any law Congress may pass. We will therefore not have a default.

The downgrade in credit rating is another story.