Default : Not A Constitutional Option
Ed Yardeni | Oct 08, 2013 12:13AM ET
It’s a sad day when Beijing has to tell Washington to get its fiscal act together. That’s exactly what happened yesterday when a Chinese official said “the clock is ticking” and urged US officials to “ensure the safety of the Chinese investments.” Of course, if the fiscal stalemate continues and the debt ceiling isn’t raised, there are more than enough tax revenues to cover the interest payments on the federal debt. As I noted yesterday, a section of the 14th Amendment of the Constitution says that the public debt of the US “shall not be questioned.”
The current statutory debt limit is $16.7 trillion and must be raised by October 17, according to US Treasury Secretary Jack Lew. Over the past 12 months through August, net interest paid by the US federal government totaled $219.5 billion. Over the same period, tax receipts totaled $2.7 trillion.
Let’s for expository purposes assume that the debt ceiling isn’t raised over the next 12 months and that tax receipts and interest payments remain the same over the next 12 months. That would leave $2.5 trillion in tax receipts after interest is paid. Outlays, at $3.4 trillion over the past 12 months, would have to be cut by nearly a trillion dollars to match revenues after interest payments. That would still cover all federal entitlements spending, but would leave us literally defenseless, and park-less.
If the President decides to default on the federal debt rather than cut other outlays, he would be violating the 14th Amendment. These may be extreme times, but such an extreme measure is highly unlikely. The President could also interpret the Amendment as giving him the power to unilaterally raise the debt ceiling. So the Chinese can rest assured that their investment in US debt is safe.
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