Leaving aside the global economic devastation that such an action would take, is it possible? Or, could a department or agency within the government declare bankruptcy?
I think not -
Regards,
Shodan
That just means you’d need an amendment to do it. 
Curious; why did they feel they needed that provision after the civil war? I know the Union went heavily into debt to finance the war, but why a statement at the constitutional level? Were they afraid that the former rebel states would repudiate a debt incurred to defeat them?
Other nations have done so- for all intents and purposes.
Sure the government could declare bankruptcy. Just like an individual they could say that their income wasn’t sufficient to cover their outstanding debts and they were renouncing them. In the case of the United States, those debts would be paying off the treasury bonds that were issued to finance deficit spending and paying social security. Renounce those two and you’ve balanced the budget. The downside being global economic chaos.
As Shodan pointed out, the Constitution mentions this issue. But the wording is vague enough that it could be skirted around. A court ruling could state that that clause forbids any third party from questioning the validity of public debt but doesn’t prohibit the government itself from doing so.
I believe they were talking about currency back when that amendment was passed. Some people were arguing that paper money wasn’t real; that the government could only use gold or silver coinage as money. The fourteenth amendment basically told those people to shut up.
The Federal Government cannot “declare bankruptcy.” Bankruptcy is a specific legal term that allows a debtor certain protections and refers the debtor and creditors to a court proceeding for adjudicating outstanding debt. There’s simply no supra-national bankruptcy process that the federal government could enter into.
Could a government refuse to honor its debt? Sure – it’s happened numerous times throughout the ages. The Constitution might present some problems in the case of the US, but if it every gets to the point where the federal government is considering canceling the national debt, we’re probably already at the point of a Constitutional crisis.
I basically agree with this. If you look at Sections 101 and 109 of the bankruptcy code, it would appear that the federal government is not eligible to be considered a “debtor” under the bankruptcy code.
In theory, Congress could amend the bankruptcy code to allow the federal government to file. Alternatively, Congress could revoke sovereign immunity as to the obligations of the United States Government. Would these Acts survive scrutiny in the Courts? Based on Shodan’s cite, it seems likely that such an Act would be struck down as unconstitutional.
I agree with this too. Notwithstanding the Constitution, the Courts might be unwilling to stop Congress from dishonoring the national debt.
In any event, the more likely scenario is that the U.S. Government simply devalues the dollar. If done to a great enough degree, this would accomplish essentially the same thing as declaring bankruptcy. As far as I know, it’s perfectly legal. And the U.S. would get to hang on to its substantial assets.
I vaguely remember an old movie called something like Americathon, where the US was bankrupt and going to be sold to the Arabs or something, but they held a telethon to buy it back. (Mostly, I remember the White House being on the west coast and everybody riding bicycles.)
Alternately, could the US Government disavow specific debt as a tool of statecraft or war?
Suppose, for example, the Chinese get playful and start randomly bombing Taiwan. The irritates us and a carrier task force is dispatched. But also, the government decides to kill two birds with one stone and announces to the world that any debt instruments of the United States held by the PRC and now null and void and suddenly the PRC has the largest write-off in history.
Would that fly? Remember that old line “Borrow ten dollars and the bank owns you. Borrow a million and you own the bank.”
Apparently the U.S. Government froze Iraqi and Kuwaiti assets in the U.S. after the invasion of Kuwait, and the freeze included treasury bills:
Yes. The more important concern was addressed in the second clause of Section 4:
After the first round of Reconstruction elections, in which only whites were allowed to participate, several Southern state governments had attempted to honor the debts incurred by secessionist legislatures during the War. Section 4 shot down that idea.
As an add-on, the framers added the clause guaranteeing the validity of the Union federal debt. There was no immediate threat of repudiation, but it was easy to imagine Southern representatives launching such a drive (after all, taxes were high and only Northerners owned bonds!) after they were readmitted to Congress.
You could do this, but you would need to reflect on the consequences for people other than the PRC.
First, this has consequences for all holders of US government debt. Sure, their bonds haven’t been cancelled, but they are suddenly a lot less saleable in the market. US government instruments are highly marketable precisely because they have such a minimal risk of default. I’m going to be a lot less interested in buying them if there is a chance that they will evaporate in my hands if whatever junta happens to occupy the White House takes a dislike to me at some point in the future. Bottom line: if the US government defaults on one bond, it devalues them all.
Secondly, this has consequences for the US government and its taxpayers too. The US government can currently borrow more cheaply than virtually anyone else because the perceived risk of default is so low. If default becomes a tactic to be deployed for political reasons, the US government can’t borrow so cheaply any more. Expect big, big permanent interest rate hikes, with obvious consequences for US government finances. And knock-on consequences in the financial markets.
It is generally not in the interests of any government to default on its public debt. That’s why they tend not to default if they can possibly avoid it. The US government is no exception.
So the federal government cannot declare bankruptcy because it’s prohibited by federal law. Can you see how that would be a minor obstacle if the intent was there?
Let’s restate the problem slightly. Could the United States unilaterally restructure its debt obligations, so as to pay them other than per their stated terms? In such a scenario, there would not be a bankruptcy in the ordinary sense of a court proceeding administering an estate, but the effect would be similar. Note that this need not - indeed, likely would not - entail repudiation of the debt. Rather, it would be the substitution of new debt for old, on terms the holders doubtless would consider unsatisfactory, not least because it would be nonconsensual.
OTOH, it’s hard to see what the holders could do about it, except of course that they would be almost certain not to lend any more money. And therein the rub. It’s not just that the current system depends on regular (voluntary) substitution of new debt for old. It also depends on raising more money next month than was raised last month, because the budget runs at a deficit. In the short run, it probably would be possible to keep the system going by borrowing internally. But that would not be viable for long. Necessarily, outlays would have to be curtailed significantly and who can say where the cuts would be made. In any event, it wouldn’t be pretty.
Mind you, I don’t think this scenario is likely. The holders have almost as much interest in not letting things get to such a pass as does the government. Some other solution is almost certain to be found. But the OP, as I understand it, is concerned with what is possible.
This is correct, but the IMF was trying to create that process in the early part of the decade, but it looks the talks stalled in 2003. Sovereign Debt Restructuring Mechanism Fact Sheet . It certainly wasn’t expected that the United States would use it. It was intended for nations known for previously defaulting, primarily in Latin America and Africa, and provide a structure to the current chaos that occurs whenever nations do repudiate their debt.
But if anything ever does come to fruition, I don’t know why the United States could not use that process also. And if it appears that it needed to, I’m fairly certain the IMF would have to step in. How that would work politically is beyond me, since the US effectively controls the IMF, but that might not hold for much longer (i.e., give or take about ten years) with the growth of China and India.
Straightout defaulting wouldn’t occur outside of some calamity wherein getting bonds cashed would be the least of anyone’s worries. The usual procedure for governments in debt over their heads is to inflate any obligations to insignificance. (The recent fall in the US$ might well be an attempt to do just that)
This strategy is not without dire consequences, or even all that controllable by the PTB; but it maintains the technical legitimacy of the debt.
Political snipe: There is no reason to think that the deficit runups of certain recent administrations are not deliberate.
Isn’t that always true though, for any question?
It depends what you mean by “federal government,” since the federal government has 3 branches.
Normally when the federal government files a suit or proceeding in court, it’s done by the executive branch. i.e. the President through the U.S. Attorney’s office. Which can normally done without any special act of Congress.
A hypothetical bankruptcy filing would need, at a minimum, an act of Congress to allow it. So if the President wanted to file bankruptcy, but he didn’t have enough support in the Senate, it would pose a problem. This is where the Judicial branch comes into play.
By the way, the more likely scenario is that the U.S. Government simply devalues the dollar. If done to a great enough degree, this would accomplish essentially the same thing as declaring bankruptcy. As far as I know, it’s perfectly legal. And the U.S. would get to hang on to its substantial assets.