Flee to Mars If U.S. Commits Major Error

Ambrose Evans-Pritchard Daily Telegraph July 28, 2011

Thursday 28 July 2011 | Blog Feed | All feeds

By Ambrose Evans-Pritchard Economics Last updated: July 27th, 2011

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President Obama has categorically ruled out a constitutional challenge to the US debt ceiling since I wrote yesterday's blog.

Spokesman Jay Carney said the White House cannot invoke the 14th Amendment, which stipulates that US federal debt “shall not be questioned”.

“It's not available. The Constitution makes clear that Congress has the authority, not the president, to borrow money and only Congress can increase the statutory debt ceiling. That is just a reality,” he said.

That is questionable, but let us move on.

Obama had previously been vague about this, saying White House lawyers were “not persuaded that is a winning argument”. It is a revealing turn of phrase. This is indeed about winning arguments, not abiding by constitutional law.

It is understandable why he should wish to avoid to an end-run around Congress in this violently polarized atmosphere, though it would not have stopped have FDR. (He went much further by stacking the Supreme Court).

However, the 14th Amendment still binds the nation. The US cannot miss a coupon payment on past debt without breaching the nation’s highest law, and without defiling the honour of the United States.

So this shifts the balance of probabilities a little further towards a brutal fiscal shock as spending is cut to meet the debt ceiling, if Congressional leaders fail to marshal their troops in any semblance of order over coming days.

Since tax revenues cover just 60pc of the federal budget, the squeeze would have to be on a scale large enough within a few months to tip the US economy into a downward spiral and take the world with it.

As an historic policy error it would match the New York Fed's decision to raise interest rates twice in one week in October 1931, but at least the Fed had an excuse. (The Banque de France had withdrawn gold reserves from the US).

Mr Obama might conceivably calculate that mass furloughs or Social Security cuts or whatever shape austerity might take would do more damage to the Republicans than to the White House. It seems an unlikely hypothesis to me. I leave it to American readers to debate who would come out of this in worst shape. I adamantly refuse to take sides in this dispute. Both parties have brought America to this unhappy pass over the last 50 years. A plague on both their houses.

Should America embark on such fiscal contraction at a time when economic growth has already slipped to stall speed, and debt deleveraging continues with a vengeance, I would like to flee to Mars for safety.

Yes, there is such a concept as an “expansionary fiscal contraction”, as in Ireland (1980s), Denmark (1990s), arguably Canada (1990s), and the UK after both 1932 and 1993, but in every successful case this was accompanied by monetary loosening. That card has already been played this time.

Should America instead opt to evade these fiscal cuts by actually defaulting on debts accumulated by self-indulgent baby boomers, I would also like to flee Mars because such an outcome might be even worse.

Those who choose to breach America's sacred bond to creditors across the world in this squalid way, in circumstances short of war or extenuating distress, deserve our contempt. Be they accursed forever if they stoop so low.

As for America's loss of its AAA rating, a number of readers strongly disagree with my view that this would be a one-day drama, arguing that great numbers bondholders would be forced to sell their debt under investment rules.

I do not find that sort of mechanical argument to be convincing. You can change those sorts of rules in a heartbeat, just as the ECB tweaked its collateral rules for Greece when it needed to, or Japan softened regulations after its downgrades.

The AAA debate is a distraction.

Tags: 14th Amendment, debt ceiling, debt crisis, President Obama, US Treasury, USA

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Flee to Mars If U.S. Commits Major Error

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