With Congress all tied up in knots over an issue that shouldn’t even be an issue, attention shifts to the President and what his options might be. They are, simply stated, limited and bad, but one is clearly preferable over the other. Before I describe the options, here are the basic facts that need to be understood as Congress prepares to play its hand, one way or the other.
Because the U.S. treasury never has sufficient revenue to meet all of its expenses, it must borrow funds every day to make the payments it is obligated to make. These payments include interest and principal payments on loans it has secured from private individuals and foreign governments, payments to recipients of Social Security and Medicare, salaries to employees of the federal government (military personnel comprising the principal group), and payments to foreign governments and others with whom the country contracts in trade.
The government secures the funds needed to make up for the deficits that regularly and constantly exist by borrowing funds, thereby creating indebtedness. By law, the amount of that indebtedness cannot exceed a figure assigned by Congress. The number is more theoretical than practical in that the government is always able to borrow the funds necessary to meet its obligations because it can always get more.
In this sense, the U.S. government is like the goose that lays golden eggs. It always has more money available to it because it is always a good investment for those with cash to lend. In other words, the United States is bankrupt-proof—with one exception.
And that one exception is what might happen this week. In short, the government can bankrupt itself if the Congress, which is the branch of government that authorizes the borrowing the treasury must do, refuses to allow the government to borrow any more money. This is what is called the “debt ceiling.” The term identifies the amount of indebtedness the Congress has authorized the treasury to incur. It is an actual dollar figure (currently somewhere in the region of $17 trillion). Once that amount of indebtedness has been reached, the government, by its own self-imposed law, is restricted from borrowing any more money.
The result is that some of the existing obligations of the government have to go unpaid, which is what the U.S treasury—which is part of the executive branch and therefore part of the Obama administration— will face this week if Congress does not extend the debt ceiling by authorizing more indebtedness.
Several things should be obvious if I have explained the situation well. The main one is that the only way the government can become bankrupt is if it bankrupts itself. Or, put another way, the only way the executive branch of the government will be unable to pay the bills incurred by the government would be if the legislative branch of the government refuses to allow the executive branch to add more debt to the country’s ledger.
The second point that should be apparent is that Congress (the legislative branch) would have no justification for refusing to extend the debt ceiling if it took responsibility for what it has done in the first place, since it is the Congress that also authorizes all of the spending that the government takes on. In other words, the Congress passes the laws that require the president to spend the money. If it then refuses to allow the president to borrow the funds to pay the bills it has required the president to amass, it is acting irresponsibly.
But politics is the name of the game in Congress, and the current majority in the House of Representatives has chosen to deny the president the ability to borrow any more money. The politics of that strategy is currently unclear. At first it appeared to be an effort to get the Affordable Care Act repealed or severely restricted. Now, it seems to be more aimed at getting “entitlement reform,” which is a euphemism for cutting benefits to Social Security and Medicare recipients.
Ultimately, Congress may back down from its suicidal strategy, but if it doesn’t, and by the time you read this the decision may have been made, then President Obama will have a major decision to make, which might then lead to other major decisions.
The first major decision he will have to make is whether to break the law and borrow the funds necessary to pay the outstanding bills the government has. This would be an impeachable offense, but it might also be the most responsible thing he could do, because a U.S. default on its obligations could send the country, indeed, the world, into a massive recession. Already this past weekend, leaders of foreign governments had started to clamor for a resolution that prevented a default.
Obama could adopt the view that as between two evils—violating U.S. law by borrowing in excess of the debt ceiling or abiding by the debt ceiling and thereby refusing to pay bills incurred by the government—he was choosing the more responsible, albeit illegal option. Choosing that option would avoid a potential financial catastrophe. His political opponents would cry for impeachment, but at least he would be a hero in the Senate trial that would undoubtedly acquit him.
But assuming Obama takes the safer option and abides by the current debt ceiling, he would then have to decide which obligations to pay and which to default on. This is the more likely path this president will take, in my opinion. He is not, so far as I perceive, a man of great political courage, at least not so great as to put himself in position to be impeached by the House of Representatives.
Therefore, he may soon be faced with the choice those in Congress who are running with this suicidal strategy want him to face. He may have to decide whether to default on Social Security payments for the elderly or interest payments to the Chinese. It might sound like a simple choice, but the guess here is that the elderly are going to take the hit.