In military terms, the government shutdown is conventional warfare and refusing to raise the debt limit is nuclear war. In short, it is an order of magnitude more serious, more dangerous. Yet Congressional Republicans have made clear their intention to go nuclear unless President Obama accedes to their budgetary demands. On Sunday, the House speaker, John Boehner of Ohio, threw down the gauntlet: “We’re not going to pass a clean debt limit increase.”

One reason for the confusion about the seriousness of the debt ceiling standoff is that Republicans routinely argue both sides of the issue. They contend that not raising the debt limit risks a financial collapse like the United States suffered in the fall of 2008; therefore, President Obama must acknowledge and give Republicans what they want. But they simultaneously say it’s no big deal; that the Treasury can just pay China, which holds $1.3 trillion of Treasury securities, the interest it is owed and stiff everyone else.

It is common to hear Republicans pooh-pooh the danger of default by saying that the Treasury has much more cash coming in from tax withholding on a monthly basis than it owes bondholders. It can simply prioritize payments, they say. (But Republicans have also passed the Full Faith and Credit Act, giving the president authority to prioritize payments, which strongly suggests he can’t now do so.)

Those who say this are either ignorant or mendacious. There are two problems with this theory, legal and practical.

The legal argument has been made by such scholars as Neil Buchanan of the George Washington University, Michael Dorf of Cornell and Jack Balkin of Yale, among others.

They make the point that the debt limit is a public law, not a part of the Constitution with higher standing over other public laws. Appropriations are also public laws, as are entitlement programs like Social Security and Medicare. And of course those who sell goods and services to the federal government, as well as those who bought its bonds, have contractual rights to be paid. Moreover, there is a law called the Prompt Payment Act, which requires the government to pay its obligations when they come due.

Therefore, if the Treasury lacks the cash on hand to pay the bills that are due, which it says will happen on Oct. 17, something has to give; one law or another must be broken on that day. On Day 1, it probably won’t be the bondholders who will suffer. That is because the first big Treasury interest payment isn’t due until Oct. 31, according to the Congressional Budget Office. But on Oct. 17, there will be somebody who would otherwise be paid that day who won’t because there will not be enough cash to pay everyone.

Contrary to popular belief, the Treasury can’t sift through the various bills due each day and decide which to pay and not to pay. In many cases it lacks the information to know what a bill is for. Payments are initiated by the departments and agencies, which forward invoices electronically to the Treasury’s Financial Management Service, which has no idea what the invoice is for. All it can do is check to see if the payment is valid and there are sufficient funds in the relevant account to pay it.

This means that any prioritization has to be done by the departments and agencies in close collaboration with the Office of Management and Budget, which determines how much of their budget they have available to spend at a given time.

Presumably, the departments and agencies could prioritize payments, but it would take time to do so, and if they don’t start until Oct. 17, it

will be impossible to do so immediately. If the government is still shut down, many staff members needed to prioritize payments will be on furlough.

While some government vendors may not be too inconvenienced by being paid a little late, the same cannot be said of Social Security recipients, those receiving veterans’ benefits, civil service pensions and many others, including hospitals treating Medicare patients and so on. On Oct. 23, a $12 billion Social Security payment must be made, followed by a $6 billion interest payment on Oct. 31. On Nov. 1, a huge $67 billion payment must be made for Social Security, veterans and others.

Insofar as interest is concerned, the Treasury has said it is unrealistic for it to put off payments in the days leading up to when an interest payment is due in order to be certain that it has the cash to make it. Its systems are set up to make payments when they are due, whether the cash is there or not. For this reason, the Treasury has said that in the event of a cash shortage resulting from failure to raise the debt limit it would simply pay its obligations in order as the cash came in.

Should this lead to bondholders not receiving their payments exactly on time, however, it creates huge financial problems, because the Treasury would now be in default, and defaulted securities cannot be traded, accepted by the Federal Reserve as collateral or held by money market funds. In a note published on Oct. 5, Goldman Sachs said money managers would be forced to dump Treasury securities before Oct. 17 to avoid being stuck with securities that could not be traded.

Keep in mind also that the Treasury really has no choice but to wait until the last possible minute to begin delaying payments or default on Treasury securities, because it is always possible that Congress will act at the last possible moment.

Some scholars have asserted that should members of Congress ignore their oath to defend the laws of the United States and default on the debt becomes unavoidable, the president should invoke the Constitution to override the debt limit. They point to Section 4 of the 14th Amendment and other sections of the Constitution that would permit such action.

President Obama has said repeatedly that the constitutional option is off the table. The Treasury says failure to make any payment when due constitutes default. And Republicans either think that they have the president over a barrel or that it is no big deal, depending on whom you ask.

What we know for certain is that we will be in uncharted waters. And given that United States Treasury securities are essentially the foundation upon which the entire world financial system rests, those are dangerous waters indeed. Only a fool would enter them if they could be avoided.


Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of the forthcoming book “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”