It’s hard to fathom that the U.S. will default on its debt, but in the event Congress can’t come to an agreement to raise the debt ceiling, we have little doubt President Obama will circumvent Congress and invoke Section 4 to 14th Amendment of the U.S. Constitutional. The clause was originally intended to ensure the payment of the country’s debt after the Civil War and reads,
Section. 4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.
Read “the public debt of the United States…shall not be questioned.” President Bill Clinton stated last week he would unilaterally invoke it “without question” if the Congress were unable to reach an agreement and “would force the courts to stop me.”
The current impasse reminds us, though on a grander scale and with much more at stake, of President Clinton’s $50 billion dollar bail-out of Mexico in 1995. After the collapse of the peso just a few weeks into the administration of Mexico’s new President, Ernesto Zedillio, the country was in the midst of a financial meltdown and close to default on its sovereign debt.
The Clinton Administration tried to persuade Congress to appropriate the bailout funds but met stiff resistance from both political parties. Even Ross Perot, the third party Presidential candidate who took almost 20 percent of the popular vote in the 1992 election, testified in Congress against the bailout.
Pressured by Mexico’s collapsing markets and with support for the bailout fading on Capitol Hill, President Clinton circumvented the Congress by using the U.S. Treasury’s Exchange Stabilization Fund, an account normally used to stabilize the dollar, to fund the loans. This took some real political “huevos” and we have no doubt President Obama is equally endowed and will act in a similar manner if faced with default.
Let’s hope we don’t get to that point as it may be beyond the financial “Rubicon,” in a land of Banana Republics, sovereign downgrades, spiking interest rates, and financial panic. Get it done!