14th Amendment, Debt Ceiling & Perpetual Bonds: The Treasury Department is Hiding Political Failure In Technocratic Excuses

Many thanks to Carlos Mucha for his generous assistance.

The 14th Amendment is strongly relevant to the debt ceiling, but unlike what some elected officials and journalists have claimed, it is not a ‘hidden power’ that can be invoked to carry out some obvious action. It is a Constitutional constraint that requires the Treasury Department to take any lawful action that would avoid a breach.

If there is a lawful action that simultaneously avoids both a breach of the debt ceiling and a default that violates Section 4 of the Fourteenth Amendment, the Treasury has a duty to pursue such action to the fullest extent. There are in fact multiple Constitutional constraints and considerations that the Treasury must take seriously right now, including the potential relevance of the Presentment Clause and separation of powers principles. All of these considerations make default and 'payment prioritization' highly disfavored outcomes even on legal grounds, leaving aside the catastrophic economic implications. And the fact that Treasury appears to be operationally unready to undertake such lawful action—even though the debt limit was functionally reached over four months ago—is an act of constitutional malpractice of the highest order. We sincerely hope the Treasury is taking operational readiness more seriously than meets the external eye.

Thus far, Treasury seems to have gambled that political, media, and business-driven pressures on Congressional Republicans might force a change of heart towards a "clean" debt ceiling hike. But such a gamble is purely a speculative political judgment–and a poor one at that. Speaker McCarthy has political leverage and a fragile caucus to please–two facts that would have informed even the most novice of political observers away from a “clean hike” strategy that was divorced from credible unilateral solutions. Furthermore, none of the actors supposedly motivating the GOP caucus, like bankers or the business community writ large, has any interest in pushing the GOP towards a “clean hike.” Unlike everyday working Americans, such actors are unlikely to feel the worst of the political compromises that might be made to raise the debt ceiling. And they have insufficient incentive to weed out the moral hazard dynamics stoked by such concessions, all of which increase the needless prospect of future debt ceiling showdowns and default risk.

Now the most concerning piece of this: having failed both in its political strategy and in developing the operational readiness to undertake lawful alternatives, Treasury’s poor political judgments are being masked by technocratic justifications ('the Supreme Court might block our action’ or ‘anything other than a debt ceiling increase would sow too much uncertainty and spook financial markets’). At every critical juncture, the Treasury in particular has been most eager to write off any pathway to a lawful unilateral resolution and seems poorly informed about the full suite of solutions available.

Make no mistake, multiple lawful solutions exist, and some do not involve strained interpretations of the law or even unprecedented actions. If the Treasury is sufficiently competent, it would already be prepared to execute unilateral solutions that overcome the array of legal, technical, and political constraints. In addition to the more well-known “platinum coin” solution, the Treasury retains the authority to issue callable perpetual bonds, that too in the statutory provision that directly succeeds the debt ceiling in the U.S. Code. Unlike the statutes pertaining to the issuance of Treasury bills and Treasury notes, the statute pertaining to the issuance of bonds does not specify a time limitation in which there is to be a principal payment to be repaid. Issuance of perpetual bonds would straightforwardly not count against the debt ceiling because perpetual bonds have no face value and are issued exclusively on an interest-bearing basis. Issuing such instruments is not even novel; they have precedent and a substantive financial purpose other than avoiding the breach of the debt ceiling. The Treasury established the precedent and practice of issuing callable perpetual bonds before the debt ceiling and general bonding authorities were ever enacted.

Everything up to this moment suggests that the Treasury is not prepared to implement such solutions, and has instead chosen to travel down a dangerous path. It smacks of delusion to prematurely write off all credible alternatives in the hopes that ‘burning the ships’ might motivate a ‘clean’ debt ceiling increase on its own. We would argue that this reflects a lack of seriousness about the realities of a default, and a lack of respect for the Constitutional and statutory obligations officials are sworn to uphold. If what appears plainly obvious is in fact true, Treasury needs to be held accountable for its irresponsible approach to planning and tail risk preparation. We can only hope that the Treasury expeditiously demonstrates to the public that they are ready to take all lawful solutions to the debt ceiling showdown, including unilateral solutions, with the requisite seriousness.