Little-Known Law Could Erase National Debt!

31 U.S.C. § 3108: An obligation issued under sections 3102–3104(a)(1) [Treasury bonds, notes and bills] and 3105–3107 [savings bonds] of this title may not bear the circulation privilege.


This law has been on the books long enough to control all outstanding Treasury debt instruments.

The “circulation privilege”? Yep, it means what any trader in U.S. debt securities would insist it cannot possibly mean: that the issuer may refuse to redeem the instrument if presented by any but the original obligee. See Hitner v. Lederer, 14 F.2D 991, 993 (E.D.Pa. 1926) (provision that bonds “shall not bear the circulation privilege” means that such bonds “are not a medium of exchange recognized by law”). What else could it mean?

Who might be the original obligee of an instrument issued in bearer form is an interesting question, but in recent time the vast majority of U.S. debt instruments have been issued in registered form. What about the Treasury practice of “registering” assignments of instruments? In the first place, administrative practices of the Treasury cannot alter the law, and 31 U.S.C. § 3108 is law. Secondly, the fact that the issuer may refuse to redeem upon presentment by someone other than the original obligee doesn’t mean that it must so refuse. And however consistently it does not, in practice, refuse, in principle its right to refuse remains unaffected.

How the nowadays vast and ever-churning market in Treasury debt securities came to operate in blithe disregard of this law is no doubt an interesting piece of history. One surmises that at a certain point, after the Treasury had disregarded § 3108 for a period of time, “the market” assured itself that the Government could not possibly risk crashing the financial system, and thus the economy, by all at once invoking it.

But now Messrs. Boehner and McConnell are promising to crash the financial system, and after that the question will be, “What can the U.S Treasury do to pick up the pieces?” In this light, the sudden discovery that by virtue of § 3108 very few holders of U.S. debt are in a position to make legal demand for payment might acquire new and previously unsuspected utility. The Treasury could announce a drastic restructuring (exempting such debt as is shown to be held by the original obligee) without triggering a “debt incident.” The rating agencies would no doubt come forward explaining that of course they had only meant their AAA rating to apply to U.S. debt instruments that had not been circulated in disregard of the law.

Treasury could then without qualm cover the costs of keeping the power on at the National Archives (thus saving the Declaration of Independence from crumbling into dust overnight), maintaining such vital services such as those provided by Blackwater USA and the like – oh, and even continuing to issue the Social Security checks.

What Color Is the Yellow Peril?

Politco.com article on GOP candidate for special election to US House

In light of this report, who can deny that the Republican Party (in Nevada, at least) has become the vessel and willing tool of dangerous reactionary demagoguery? And on what basis can one rate the Republican Party of any other state superior to that of Nevada?

The only difference between reactionary and revolutionary demagogues is that the former simply pander to the ignorant prejudices of the masses as they find them, while the latter attempt to manipulate and rearrange them. In the long run both are equally dangerous to any system of ordered liberty.

With “conservatives” like this, who needs Bolsheviks? (Indeed, did Lenin cause default on the Czar’s debt with any less insouciant contempt than Amodei threatens default on “Obama’s”? But Lenin was not a fool, and unlike Amodei and the Nevada GOP, he really had nothing to fear from the bondholders … )

Debt Ceiling: Paying Attention to the Politics

John Zogby's 6/15 column for Forbes magazine noted that his organization's most recent poll had found 52% opposed  to a debt-ceiling increase and 41% in favor.  He went on to observe:

45% of all voters would be more likely to support the [debt-ceiling] increase if major budget cuts are part of the deal. That includes slightly more than one-half of the voters who oppose raising the debt ceiling. So if Washington could satisfy them with cuts, we could have voter consensus on a deal.

But have the pollsters separated out the data by "Red" and "Blue" states, or better yet, by Congressional district? What does a Republican up for re-election in 2012 have to deliver along with the debt-ceiling hike in order for primary voters in his state or district to forgive a "Yea" vote? That is what each such Congressional Republican is and will be asking himself. Sarah Palin's comment with regard to increasing the debt ceiling was simply, "Hell, no!" and anecdotal evidence (a perusal of comments left on news websites) suggests that the profane pixy from Wasilla did not overstate the "Tea Party" position.

The set of likely Republican primary voters, in Congressional districts represented by a Republican, and/or in states with one or more Republican Senator, is a very special subset of the general population. But the perceived attitudes of this subset will be crucial in determining whether the necessary majorities for affirmative Congressional action to increase the existing cap on full-faith-and-credit borrowing can be mustered.

I suspect the package Tea Party voters would demand in order to approve the debt-ceiling hike is much bigger than the package Congressional leaders, of either and/or both parties, could deliver.

(How many bond traders have as yet even considered these Washington dynamics, much less given them the detailed scrutiny they demand? All indications are that Wall Street continues to assume, blithely, that the necessary ceiling increase, with or without some fiscal austerity bonus, wil be forthcoming in good time.)

Avoiding default, therefore, depends on (a.) selling the Tea Party masses on the need for a debt-ceiling increase, or (b.) persuading Congressional Republicans to do the statesmanlike and responsible, but possibly politically suicidal, thing and vote for a bill that does not include abolition of the Department of Education and the Federal Reserve.

Contempt for all experts, even a profound suspicion of the very notion of expertise, however, is one of the hallmarks of this "conservative" movement. Who will explain the dangers to one of their seething town-hall meetings with any hope of being listened to? Even if such a brave person emerged, he would face the constant rejoinder that failure to rein in the deficits must someday produce the increased borrowing costs and downward fiscal spiral that ceiling-hike advocates warn against. While this observation may be valid, there is a big difference between "someday" and two months from today.

But the Tea Party believes that even if there should be some consternation in the bond market come August, it will be able to set things right. Warnings of the risk of more dire consequences will have little effect, because it is easy for this cohort to dismiss the "speculative" predictions of "so-called experts." Besides, they can find experts of their own to tell them what they want to hear. It also doesn't help that the warnings sound very much like those sounded by Wall Street and the Bush Adminisration in the course of their first, unsuccessful effort to obain the TARP legislation.

On that occasion, it took a jolt from the stock market to prod Congress into action. On this issue, continued inaction will most certainly result in a jolt. The concern I have been expressing is that the shock, when at last it comes, could well be huge, wholly uncontrollable in its immediate sequellae, and epochally catastrophic in its ultimate consequences.

There remains the hope that Boehner, McConnell and today's crop of GOP groundlings will brave political ruin to do the responsible and statesmanlike thing.

'Nuff said.

It does not help that this gang has played "Chicken" with the Democrats before and won, coming out with jalopy unscathed and glorious. When you talk to them of the urgency and peril of the situation, they only calculate the greater certainty of their foes' capitulation, and begin devising another escalation of their own demands.

Riding the Dragon?

Wednesday Li Daokui, an adviser to the People's Bank of China, told reporters in Beijing that he hopes Republicans in control of the US House of Representatives will "stop playing with fire. ... I really worry about the risks of a U.S. debt default, which I think may lead to a decline in the dollar's value."


USA Today article

Ya think?

Even getting to the point where holders of US debt perceive a significant risk of default, however "brief" or "technical" -- which they don't, yet, and I believe they don't only because they fail to grasp the seriousness of the situation in Washington -- could very well lead to large-scale selling of such debt.  But exchanging Treasury debt for dollars makes no sense, because dollars are merely another form of US government debt. The worried bondholders would, directly or indirectly, trade Treasury obligations for something else: Aussie dollars, cruzeros, copper futures, gold bullion, etc. The net effect is large-scale selling of US dollars. That's why Li is right to anticipate a decline in the dollar's value.

The question is, how far and how fast would the dollar fall? And the further question: at this (post-Lehman, post-TARP, post-QE1 & 2) juncture, how far and fast can the dollar fall without collapsing altogether?

The perception that the dollar's value is declining rapidly would accelerate the movement out of Treasuries and all other dollar-denominated debt. Thus the dollar's value declines even faster. At a certain point, a goodly number of people around the world begin to think it very likely that by tomorrow afternoon the number of yuan/euros/ounces of gold/barrels of oil/widgets FOB Detroit/economic good X that you can get for a dollar will be appreciably smaller than the number you can get right now. Then the dollar-dumping begins in earnest.

At this point, the fact that Emperor Dollar really is stark naked and there is nobody who can even toss a blanket or a towel around him will become inescapably clear to those who are paying attention. In light of recent history, the Fed and the Treasury probably could not even respond effectively to another Lehman Brothers. A run on the dollar sparked by anticipation of a Treasury default would be Lehman Brothers x 100 (at least). Measures that in days of yore might have shored the dollar up will only aggravate the panic. And the realization that there really is no bottom under a plunging dollar will engender generalized and absolute panic.

Those with any understanding of the situation will recognize that the world as we have known it is ending. The sudden death of the world's only reserve currency, the one universal measure and store of value and the vital medium of global commerce, would bring world (and even US domestic) trade to a screeching halt and spell financial, and therfore economic, Armaggedon.

Playing with fire, indeed. Only, one would think that the rich literary history of China might provide an even stronger, and thus more apt, metaphor.