When Washington Starts Breaking Precedents, Watch Out

While legal codes govern modern life today more so than in centuries past, they’re not the only sets of rules in our legal system. Case law, or precedent, is just as important.

Precedent isn’t just an aspect of law, however. Precedents govern many areas of our lives. And in many cases those precedents are unwritten rules that, when they’re violated, can upend the way things work.

Congress works on precedent just as much as the legal system does. The Senate is a prime example of that, with Senate rules having largely developed through precedent. But throughout Washington, precedent governs a lot of what goes on in the political process.

When precedents start to be overthrown for politically popular or politically expedient reasons, the fallout can be dangerous. But in recent decades Washington has all too often thrown out precedent in favor of short-term political victories. And the growing lack of respect for precedent could have deep ramifications for the future.

Precedents Under Threat

The most recent example of Congress breaking precedent is the recent case of the expulsion of Congressman George Santos (R-NY). Santos himself warned the House that it would break precedent by expelling him, as Santos had only been charged with crimes and hadn’t been convicted of anything.

But the House went ahead with the expulsion vote, with roughly half of Republicans joining almost the entire Democratic Caucus to vote to expel Santos. Now the unwritten precedent that a Member had to be convicted of crimes in order to face expulsion has been broken, and the bar for expulsion has been lowered.

The fact that the House voted to break a precedent that directly affects the privileges of Membership is a concerning one. If Congress is willing to sacrifice its own privileges for short-term political gain, then no cow is sacred. So what else might Congress be willing to sacrifice?

Perhaps the most important precedent in Washington is that the US government has never deliberately defaulted on its debt obligations. That’s a bedrock precedent that has undergirded government negotiations surrounding the debt ceiling, government shutdowns, and budget negotiations.

But if Congress is willing to break precedent to expel its own Members, why wouldn’t it break precedent if it becomes politically expedient to default on the national debt? After all, with interest costs on the debt expected to reach over $1 trillion per year, Congress will soon have to make some tough decisions about its spending.

The higher the national debt rises, the greater will be the cost to service that debt. And as more and more money gets used to pay the interest on the debt, less and less will be left over to spend on Social Security, Medicare, and defense spending.

Either the government starts to get serious about getting its spending in order and starts paying down the national debt, or the cost of debt service could spiral out of control, sending federal spending into a death spiral in which an ever greater amount of debt is issued just to be able to pay to service the existing debt.

At some point Congress may come to a point at which it has to make a tough decision. Does it continue adding to the national debt ad infinitum? Or does it try to strategically default on its debt in order to gain some breathing room?

How Might Default Occur?

There are two types of Treasury debt, debt held by the public or so-called “marketable” Treasury securities, and intragovernmental Treasury debt, or non-marketable securities. Right now, of the $33.9 trillion in federal debt, $26.8 trillion is held by the public, and just over $7 trillion is held in intragovernmental holdings.

Of the debt held by the public, about $4.8 trillion is held by the Federal Reserve. So how could the government default on any of this debt?

Intragovernmental holdings and Treasury securities held by the Fed are the first place the government might look to gain some breathing room. For instance, Congress could pass legislation to enable Treasury to repudiate debt held by the Fed when it comes due.

If Treasury were to do that, it could slowly decrease the size of the national debt and eliminate nearly $5 trillion in debt. The intragovernmental holdings are a little trickier, as many of those are in trust funds like those that backstop Social Security or government retirement funds, but that doesn’t mean they’re completely off limits.

Even in a worst case scenario, in which Congress had to choose between spending $1 trillion on Social Security and spending $1 trillion to pay off investors, which do you think they would choose?

Most Congressmen are self-interested and are most interested in getting re-elected. They would more likely default on an obligation to faceless, nameless investors than anger their voters by not getting them their Social Security checks.

While the likelihood of default is still some way off, it’s a scenario that could be growing closer every day, as Congress continues to rack up trillions of dollars in debt every year. And if default does occur, it could catch many people by surprise.

The Impact of Default

A US government debt default would likely see interest rates increase throughout the economy, as it would require the US government to issue debt at higher interest rates in order to sell new debt. And from there those higher interest rates would bubble up throughout the economy.

The havoc of a US government debt default is a massive unknown, but it’s one that many more people are preparing for. And one way they’re doing that is by buying gold.

Gold has been trusted as a safe haven asset and a hedge against inflation, recession, and financial turmoil for centuries. And as the US economy heads closer to recession today, gold demand is increasing, as is the price of gold.

Many Americans are looking to protect their hard-earned savings and investments against financial calamity, whether it’s near term like a recession or farther out like a government debt default. Gold can help provide that protection.

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If you’re worried about safeguarding your hard-earned money against the possibility of recession, high inflation, or a government debt default, maybe it’s time to start thinking about gold. Call Goldco today to learn more about how gold can help you.