What happens on August 3, 2011?
(1) Tim Geithner stops paying congressional salaries, impounding them in order to keep from breaching the debt ceiling...
(2) Tim Geithner stops sending out Social Security checks, impounding them in order to keep from breaching the debt ceiling...
(3) Tim Geithner begins to disinvest the Social Security Trust Fund. As FICA taxes come in, the Managing Trustee of the Social Security Trust Fund (Tim Geithner) asks the Secretary of the Treasury (Tim Geithner) to sell him some government bonds in exchange for the cash, and the Secretary of the Treasury (Tim Geithner) says: "No. I can't." The Secretary of the Treasury (Tim Geithner) takes the cash and uses it to cover the U.S. government's other obligations. The Secretary of the Treasury (Tim Geithner) tells the Managing Trustee (Tim Geithner) that because congress has not raised the debt ceiling he cannot sell the Social Security system any bonds. The Secretary of the Treasury (Tim Geithner) then puts a sign on the front of the Treasury lawn with a continuously-updated number on it: "Because congress has not raised the debt ceiling the Social Security Trust Fund has lost $x billion dollars."
(4) Tim Geithner announces that by law he is required to spend money on appropriations and entitlements--that he is not allowed to impound--and that there is not enough coming in in tax payments to both do all the spending he is legally required to do and to pay back the debt of the United States as it matures. In the absence of the 14th Amendment, he says, he would be required by law to default on the maturing debt. But, he says, the 14th Amendment forbids him to default. In order to take care that the laws be faithfully executed, therefore, even without explicit congressional authority to do so, he must borrow on the full faith and credit of the United States in order to completely (a) meet his spending obligations, and (b) honor the debt of the United States of America. He begins selling more bonds...
(4a) The Federal Reserve buys up the excess bonds above the debt-subject-to-limit ceiling...
(4b) The Treasury auctions the excess bonds above the debt-subject-to-limit ceiling and sees who buys them...
(5) The Treasury fails to pay its maturing T-bills. The U.S. government's credit rating falls to D...
Any guesses as to what will happen?
The black-letter law:
§3101. Public Debt Limit:
(a) In this section, the current redemption value of an obligation issued on a discount basis and redeemable before maturity at the option of its holder is deemed to be the face amount of the obligation.
(b) The face amount of obligations issued under this chapter and the face amount of obligations whose principal and interest are guaranteed by the United States Government (except guaranteed obligations held by the Secretary of the Treasury) may not be more than $12,394,000,000,000, outstanding at one time, subject to changes periodically made in that amount as provided by law through the congressional budget process described in Rule XLIX [1] of the Rules of the House of Representatives or otherwise.
(c) For purposes of this section, the face amount, for any month, of any obligation issued on a discount basis that is not redeemable before maturity at the option of the holder of the obligation is an amount equal to the sum of—
(1) the original issue price of the obligation, plus
(2) the portion of the discount on the obligation attributable to periods before the beginning of such month (as determined under the principles of section 1272(a) of the Internal Revenue Code of 1986 without regard to any exceptions contained in paragraph (2) of such section).
§3102. Bonds:
With the approval of the President, the Secretary of the Treasury may borrow on the credit of the United States Government amounts necessary for expenditures authorized by law and may issue bonds of the Government for the amounts borrowed and may buy, redeem, and make refunds under section 3111 of this title. The Secretary may issue bonds authorized by this section to the public and to Government accounts at any annual interest rate and prescribe conditions under section 3121 of this title...
The Treasury Secretary's argument would be that the debt in excess of limit issued is required in order for him to faithfully execute the appropriations bills, and that the 14th Amendment makes the debt in excess of limit full faith and credit obligations of the U.S. government in spite of the limit in §3101(b). The excess bonds are not authorized by §3101 and §3102. But they are authorized by the 14th Amendment.
