Response to Sam G.’s Comment on the Debt Ceiling Impasse Part 2

by robekulick

To summarize Sam G.’s comment, he argues that I have been too quick in asserting that there will not be a true default  because there maybe legal obligations that force the US government to allocate tax money to certain expenditures other than debt service. It is an interesting point, but I think it is highly unlikely for a number of reasons:

(1) There is widespread agreement that a true default would at the very least be a very bad thing and possibly catastrophic. If the legal outcome described in the comment were deemed likely I would think we would have already seen far more turmoil in the financial markets.

(2) The authority I cited for the proposition that the US will not be in a technical state of default as of Aug. 2 was Judge Richard Posner, easily one of the foremost legal minds in America and a sitting Judge on the 7th Circuit Court of Appeals. If this were a real possibility I suspect he would have discussed it and made an argument showing how such an outcome could be avoided given his belief in “pragmatic” Jurisprudence.

(3) Laws are somewhat flexible in extreme circumstances. Consider Lincoln’s suspension of Habeas Corpus during the Civil War which kept the great state of Maryland from which I currently blog in the Union.

(4) Neither the President nor anyone in congress will want a true default to occur. A government shutdown makes them look bad enough and I suspect even that will be a short lived state of affairs as I explained in my earlier post. I have every confidence that President Obama will assign a team of lawyers to figure out how to make the argument that the debt service comes first and that any judge presented with the issue will make the right decision.

(5) Finally, the intrade odds of a resolution being reached by Aug. 31 are now above 80%. The sooner the crisis is resolved, the less likelihood there is of a true default.

Of course, I’m not a lawyer, but I know there are a bunch of lawyers and soon-to-be lawyers out there. Let me know what you think?

PS: Though I don’t agree, Sam G. could of course be right. I guess we’ll see soon. I sure do hope I’m right. Either way the comment is much appreciated!!

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