FAS Market Update May 2023
A default by the U.S., meaning the government would be unable to meet its financial obligations, would have dire consequences. It would affect interest rates, the creditworthiness of the U.S., and most likely send the economy into a recession. But again, this is nothing new and there are several legal work arounds that can be taken by the Treasury called A default by the U.S., meaning the government would be unable to meet its financial obligations, would have dire consequences. It would affect interest rates, the creditworthiness of the U.S., and most likely send the economy into a recession. But again, this is nothing new and there are several legal work arounds that can be taken by the Treasury called extraordinary measures.
Extraordinary measures involve drawing down the Treasury General Account, or TGA (essentially the government’s bank account with the Fed), as well as suspending investments into government retiree funds and pension funds to free up additional funding. The two of these together give the government a few months of runway until we reach the “drop-dead” or “X date” when funds are exhausted, which Treasury Secretary Janet Yellen recently announced would be June 1.
If and when that date were to come, as it nearly did in 2011, there are additional measures the administration could take. The most likely of those is prioritization of payments, which is for all intents and purposes a default – think paying your mortgage instead of your credit card bill. The bottom line is that you don’t have enough cash to meet your obligations even though your house isn’t being foreclosed on.
In the end, however, can the U.S. truly and legally default on its debt? According to Section 4 of the 14th amendment, “The validity of the public debt of the United States… shall not be questioned,” meaning the Treasury failing to pay its obligations would be considered unconstitutional, albeit there is no precedence nor prior ruling by the Supreme Court.
Regardless of whether it came down to determining the constitutionality of a default, the damage will have already been done to our nation’s creditworthiness, the exchange value of the U.S. dollar, money market funds and the functionality of the overnight repo markets.
