Will yet another debt ceiling standoff floor us, or can the 14th Amendment keep the political parrots from flying blind? Welcome to Puzzle Drop Monday. Is there a debt crisis or not? That’s what this week’s series is all about.
The last time the Government shut down, it hurt the economy, meaning workers, professionals, small business owners, and the stock market.
And this time, it’s possible we’ll default on US debt, which is about the same thing as a self-inflicted gunshot wound.
This might risk the dollar losing its status as the world’s reserve currency. Perhaps the stupidest thing a country could do to itself.
14th Amendment be invoked to avoid a US debt default?
The 14th Amendment states, “The validity of the public debt…shall not be questioned.” This clause suggests the President has the power to override the debt ceiling to ensure America pays its bills.
Legal scholars argue the President can invoke the 14th to prevent economic calamity if Congress fails to raise the debt limit. Unilaterally raising the debt ceiling using 14th Amendment powers remains controversial but may be necessary to avert catastrophe.
More responsible budgeting is something all four sides of the table can agree on, but in the meantime, there’s a crisis to handle.
Is there a Debt Crisis?
The US total net worth is $150T. The debt is $33T, but $7T is intergovernmental, so $25T is owed to others.
Of the $25T, about $7T is held by our foreign country trading partners (they have to put the dollars we give them somewhere).
The remaining $18T is held by Americans wealthy enough to buy US treasury bonds and notes.
The average US household has a net worth of $750,000. The average household debt is $100,000. So that’s a $100,000 / $750,000 or 13% debt to net worth.
The US total net worth is $150T. The net US Debt is $25T. So, that’s $25T/$150T or 17 % debt to net worth.
Does this sound like an emergency so dire as to risk the full faith and credit of the United States of America?
A household can’t issue their own currency to pay bills.
Let’s bear in mind the US is not like a household, meaning a household can’t print currency.
The US is the monopoly issuer of net financial assets. Net, because banks can also issue currency, but they have to pay it back to the Fed. The US doesn’t have to pay itself back. It’s a book entry.
You can’t spend a net dollar until the US spends it into existence. When you pay your taxes, the money is destroyed, and a number changes on a balance sheet.
To pay down the debt, the US has to run surpluses. The only problem is US government surpluses cause depressions.
In 1817, 1852, 1867, 1880, 1893, 1920, 1928, 1998-2001 the US government briefly ran rare budget surpluses, which were followed in short order by equally rare major economic crises – the Panics of 1819, 1857, 1873, 1893, and the Depressions of 1920-21 and 1929, and the Great Recession of 2008 (delayed by the sub-prime lending fiasco). The Great Recession was technically a Depression with 15% U-6 unemployment.
Causation or Correlation?
None of the four schools of economics will likely agree on whether the rare surpluses caused the rare depressions, but come on, eight times in a row, really?
Could there have been other factors that forced the surpluses that caused the depressions? Sure, but how come no one can explain that so a precocious 12-year-old can understand it? Occam’s Razor, the simplest solution, is likely the correct solution.
Isn’t insanity doing the same thing over and over again and expecting a different result?
The Four Schools of Economics
Models don’t need to be perfect. They just need to be useful. The entire field of economics is based on a falsehood, homo economicus, the rational human. We now know that humans are emotional beings who think.
The Four Schools are Surpluses (save for rainy days), Hayekian (small government with balanced budgets), Keynesian (borrow in bad times and pay back in good times), and Modern Monetary Theory (not all deficits are the same).
Some Hayekians are predicting a depression in the 2030s when the debt service and healthcare costs will become too big.
What would likely happen if the US didn’t invoke the 14th Amendment and had a debt default?
A US debt default would probably lead to:
A. Spiking interest rates as US Treasuries lose their reputation as one of the world’s safest assets. This would increase costs for mortgages, car loans, business borrowing, and more. (High-interest rates take from the poor and give to the rich.)
B. Stock market crashes and financial turmoil as investor confidence plummets in the stability of US markets. Retirement accounts would be hit hard.
C. Downgrade of US credit rating making future borrowing for both public and private institutions much harder.
D. Collapse of the US dollar as the global reserve currency, disrupting global trade.
E. Potential banking crises and runs on banks as faith in the financial system evaporates. This happened partially in the 2011 US credit downgrade.
F. Reduced economic growth from higher costs of capital and low business/consumer confidence. Could cause a deep recession or even depression. It usually takes 5 – 10 years for the middle class to recover.
G. Problems paying government obligations like Social Security, Medicare, veterans benefits, and more if enough funds can’t be raised.
H. Higher unemployment from reduced economic activity.
I. Global financial contagion as effects spread abroad to economies linked with the US.
In essence, a loss of full faith and trust in US debt and the dollar could create enormous financial turmoil and economic damage. The impacts would likely be severe and widespread.
How about if the
government shut down?
J. Disruption of Social Security payments and services. Delays accessing earned benefits.
K. Interruption of Medicare claims processing and coverage. Seniors may lose access to covered care.
L. Suspension of Medicaid, CHIP, and ACA exchange funding. Low-income residents lose health coverage.
M. Cuts to federal food assistance programs like SNAP and WIC. Reduced support for disadvantaged families.
N. Loss of federal education funds for local public school districts. Harms programs aiding poor students.
O. Stoppage of federal highway funding to states. Major infrastructure projects halted. Democrats and Republicans and especially Independents hate potholes.
P. Interruption of federal law enforcement grant programs. Hurts local police and safety initiatives.
Q. Closure of national parks, monuments, and public lands to visitors.
R. Backlogs processing passports, visas, and travel documentation through the State Department.
S. Suspension of CDC and FDA routine health monitoring and consumer protection activities.
Here’s the PLAN: For you People-people, you can enjoy real-life political role-playing at PolicyKeys.com. Sit awhile in each role’s chair and decide whether a majority of people in that role would be for or against the solution. Empathy is power. It’s excellent for classroom engagement.
For you Letter-people, we publish daily on this Super Nonpartisan Public Policy Blog. It’s like a color commentary on the big game. Or a juicy menu to order up your favorite solutions. You can check out the US Public Policy Leaderboard (US-PPL) update for ‘us people’ every SuperMajority Sunday.
For you Abstract-people, we’ve invented a nonpartisan scoring system to include 128 roles, four laws of public policy formation, two levels of pattern-seeking AI, forecasting science, and a treasure hunt for the highest-rated solution to every public policy puzzle. We are open to public and/or private sector solutions.
Four you Numbers-people, all our solutions add up in the POL-ICYMI Key for each week’s puzzle. What stats are to baseball, PolicyKeys is to Public Policy.
Now, back to this week’s puzzle.
Let’s get on to the…
of the Week
Should the 14th Amendment be invoked to stop the government from defaulting on its debt?
The 14th Amendment is suggested as a solution to avert a US debt default. Its Section 4 implies that public debt should always be honored, especially for pensions, suggesting Presidential powers to prevent default.
ONE PARROT lends invoking the 14th Amendment could avoid economic fallout, ensuring the country’s obligations are fulfilled, and this crisis is a fiction in the first place.
THE OTHER PARROT limits it’s a controversial move, potentially leading to legal challenges, infringing on Congressional powers, not addressing the macro debt issue, and the interest on the debt will crush us.
Citizens are tired of this game of chicken over the debt.
Note: The US has essentially been deficit spending for 80 years and is the world’s top superpower.
Invoke the 14th Amendment?
‘NO’ Key Reasons
2. Conservative SCOTUS won’t approve: Invoking the 14th could face steep legal challenges, given the current Supreme Court’s conservative leanings.
4. US spending politically picks winners/losers: The allocation of federal funds can sway in favor of special interests, amplifying inequality.
6. National debt is $32 Trillion: The towering debt figure adds weight to concerns about fiscal sustainability.
8. Blame Democrats for debt default: If invoked, Republicans could argue that Democrats sidestepped constitutional norms, deepening partisan divides.
10. Short-term legal uncertainty: Implementing the 14th Amendment may generate immediate legal chaos, shaking markets and policy.
12. The extra $10T debt caused inflation: Critics claim that the additional debt has been a primary driver of recent inflation spikes.
14. We can’t afford the interest payments: As debt rises, so does the cost to service it, straining future budgets.
16. Dollar will decline on foreign markets: Invoking the 14th could weaken the dollar’s global standing, affecting trade and investment.
And More Key
18. Both parties could agree on redundancy cuts: A bipartisan approach to spending cuts could eliminate the need for 14th Amendment action.
20. Controversy breeds profits: The contentious debate itself creates short-term financial winners.
22. Recessions are a buying opportunity: Critics argue that economic downturns naturally correct market excesses and shouldn’t be artificially avoided.
24. Unchecked US spending causes inflation: Fiscal hawks believe that unrestrained spending inflates consumer prices, hurting everyday Americans.
26. The US should have a balanced budget: The idea of balanced fiscal management resonates with many who liken government spending to household budgets.
28. Invoking the 14th erodes Red state public trust: Action via the 14th could lead to backlash from conservative states, affecting federal-state relations.
30. Rising interest rates could bankrupt the US: High debt levels, if met with rising interest, could put the country on an unsustainable financial path.
32. Anger over bypassing Congress: Utilizing the 14th could be viewed as an executive power grab, undermining the legislative branch and democracy itself.
‘YES’ Key Reasons
1. $20T debt didn’t cause unwanted inflation: The initial $20 trillion debt hasn’t directly led to hyperinflation, suggesting some room for fiscal maneuvering.
3. Modern Monetary Theory is inevitable: Some argue that shifts in economic understanding make deficit spending less concerning than traditionally believed.
5. Other nations hold just $7 Trillion of debt: The majority of U.S. debt is domestically held, potentially mitigating external financial risks.
7. Fear of losing reserve currency status: Default could jeopardize the dollar’s global role, with far-reaching economic implications.
9. Recessions are bad for public health: Economic downturns often lead to worse health outcomes, reinforcing the need to prevent them.
11. COVID-19 caused supply shortages and inflation: The pandemic’s unique impact complicates traditional economic narratives around debt and inflation.
13. Default may cause a world stock market crash: The global repercussions could be severe, making the prevention of default a high-stakes issue.
15. Honoring our debt is justice: Ethically, meeting financial obligations upholds the U.S.’s commitment to creditors and maintains international trust.
And more Key
17. Climate crisis requires deficit spending: The urgency of climate action necessitates spending that increases the debt.
19. No Social Security (pension) & Medicare cuts: Protecting these essential programs could justify avoiding a debt ceiling crisis.
21. Rising interest rates are welfare for the rich: Higher interest rates benefit wealthier individuals, exacerbating income inequality.
23. US gov’t surpluses cause depressions: Historical data suggests that government surpluses precede economic downturns.
25. Economic growth usually requires deficits: Investment in public goods and services, often requiring deficit spending, can stimulate economic growth.
27. Debt ceiling erodes Blue state public trust: Just as Red states might be distrustful of 14th Amendment action, Blue states might lose faith if the debt ceiling isn’t addressed.
29. We don’t need a self-inflicted recession: A recession caused by a debt ceiling crisis would be an unnecessary self-imposed harm.
31. Debt ceiling is a mulligan for Republicans: Some argue that the debt ceiling offers the GOP a chance to revisit past spending decisions, making it less of a fiscal imperative and more of a political tool.
Last Week’s Political Flap
Should the US support a new Nuclear Generation (SMR)?
Last week’s political flap took off with the Monday Puzzle Drop introduction. Here’s the BOX SCORE from Tuesday. You’ll be scandalized by the politically strange bedfellows from Wednesday. This Thursday, the editors broke the ties and called some fowls on POLI THE AI’s plays. Friday your Political Digital Twin’s got your back. Saturday’s Keynote wraps up the week’s reporting on this solution.
YOU CAN PLAY THIS WEEK’S PUZZLE AT POLICYKEYS.COM.
US Median Household Income
St Louis Fed
Average Household Debt
US Total Net Worth
The Rise and Fall of American Growth
Princeton University Press
The Clinton Surplus
U6 Unemployment over 15% in 2008
St Louis Fed
The 2030s Great Depression
Why America Will Remain the World’s Only Superpower
American Enterprise Institute
How much would a debt default damage the US?
Christian Science Monitor
Shrinking American Middle Class
It takes guts to see things from all four sides of the political table