Carney points out that the only Congress would really have standing to file suit if the Treasury took this route. He imagines only a couple members of Congress, perhaps Rep. Ron Paul (R-TX) or Sen. Rand Paul (R-KY) would go that far. And what judge would force the U.S. into default by ruling in their favor? Indeed, what judge would want to rule on this at all? Instead, they would delay, or kick the case up to higher courts, until a deal had finally be reached, essentially nullifying the case.

This analysis stresses the practicality of the situation. No prominent U.S. officials -- no matter their branch or politics -- want to see the U.S. go into default. Other than through very dramatic cuts starting going into effect almost immediately, raising the debt ceiling is the only way to prevent that ugly fate.

But Would Investors Buy "Illegal" Treasuries?

So we've established that it isn't totally beyond the realm of possibility that the Treasury could issue "illegal" Treasuries. The decision to issue such securities would be meaningless if no one wanted to buy them. Carney addresses this question as well in a separate post. He thinks investors would bite, because any scenario where the Treasury would have to resort to this kind of extreme measure would be very scary, and when people are scared they buy Treasuries. For an example, he refers to the recent rating action by S&P:

When Standard & Poor's warned that it might downgrade the credit rating of the US, bonds actually rallied. That doesn't happen with most other sovereign or corporate issuers--for them, a warning about a downgrade usually triggers a sell-off. But debt of the US Treasury is different.

That's one explanation, but there are others as well. The U.S. Treasury is only considered "different" because the U.S. is historically considered very politically stable. If the government became so hopelessly divided that it essentially forced itself into default, then investors might begin to question that traditional view.



An "illegal" Treasury would be an inherently risky security. What if a judge decides the security should not have been issued and rules that any sold are now worthless? The government might be able to provide a refund, but the situation would be messy. What if the rating agencies responded shortly thereafter officially downgrading U.S. debt? A new crisis would erupt with global investors dumping Treasuries and dollars alike, which could send the U.S. spiraling back into recession and providing the rating agencies with an even more tangible reason to worry about U.S. fiscal health.

If I were an investor, I wouldn't go anywhere near an illegal Treasury. If things got that bad, I'd probably resort to buying gold. And maybe a bunker, some guns, and a year or two's worth of non-perishable food. The idea that the executive branch would issue illegal Treasuries and investors would happily buy them up sounds like something out of an apocalyptic novel. Even if it could happen, it stretches the mind to imagine a world in which it does.

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