Worst-Case Scenario: The Second Great Depression
The absolute worst-case scenario would be for Republicans to fall prey to their intra-party squabbling and fail to raise the debt ceiling.
What would the consequences of this be? Well, nobody really knows. The U.S. debt is 16 trillion dollars, about 20 percent of the world’s annual GDP. Granted, failure to increase the debt ceiling wouldn’t bring all $16 trillion due all at once, but it would call into question the value of all of it. If the U.S. isn’t going to pay off Bond A, why would they pay off Bond B?
In short, anyone who holds U.S. bonds would have to worry that those bonds might not be worth anything. We’re already seeing the market react to this possibility: The rates on short-term treasury bills have almost tripled in the last week, a sign that investors are backing out of the debt market.
This doesn’t just affect rich people with money in T-bills. In a very real sense, everyone in the U.S. has money in treasury bills. The Social Security Trust Fund, for example, holds $2.7 trillion in U.S. bonds. Default could result in delayed or simply missed payments for Social Security recipients, Medicare and Medicaid recipients, and U.S. troops. Moreover, simply paying interest out of revenues — something the Treasury Department would have no choice but to do — would immediately cut government expenditures by as much as 40 percent.
This would be a complete disaster, obviously. Which is why even in the absence of a debt ceiling hike, the Obama Administration would probably be forced to act. Of course, that brings its own problems.
Alternate Scenario: The 14th Amendment Gambit
In the event that Congress chooses not to raise the debt ceiling, President Obama would have three choices. The first would be to let the American and global economies melt down. This obviously is not going to be his first choice. The second option is to give in to Republican demands and delay the Affordable Care Act, which he has repeatedly said he will not do. So what’s left?
Well, Obama could simply order the Treasury Department to ignore the debt ceiling. He could take the almost whimsical step of minting the quadrillion-dollar platinum coin, or he could rely on the 14th Amendment to the Constitution, which includes a clause saying, “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.” That would be a rather tortured reading of the amendment; The language was meant to indicate that the U.S. government would pay its debts, but not those incurred by the Confederate States of America. For that reason, Obama has shied away from saying he would invoke it.
Still, given a choice between true default and a legally dodgy workaround, Obama might have no choice but to choose the latter, and that would leave him in a precarious situation. Republicans have been itching to impeach Obama since roughly January 21, 2009. If Obama invoked the 14th Amendment to stave off destruction, Republicans could accuse him of breaking the law and finally get their chance to impeach him.
Of course, Obama wouldn’t be convicted by the Senate, nor the public at large. Republicans would be impeaching the President for the crime of trying to save the country from the destruction they caused. But of course, if Republicans had any political sense, we wouldn’t be in this situation.
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