Treasury Secretary Jack Lew wrote to Congress today with an update on the Treasury Department's cash situation—it's going to run out of money on Oct. 17.
Normally that would be no problem. By law, Congress mandates that certain monies be spent on Social Security benefits. Medicare benefits are the same. Soldiers and sailors are legally entitled to pay, as are veterans to their benefits. Military and civilian contractors are entitled to money in exchange for the services they're providing. FBI agents have salaries, federal prisons have utility bills. It's legally mandatory to pay all this stuff. So when the Treasury doesn't have enough money to pay everything it has to pay, it borrows money. And luckily for the Treasury, demand for American federal debt is strong and the interest rate we pay on it is low.
But we've already reached the statutory cap on the amount of money the Treasury is allowed to borrow. So we're headed straight for a legal and constitutional crisis that could also become a financial crisis.
What laws does the executive branch follow and which does it break? What litigation will result from any decision, and who will prevail? I think the conventional wisdom actually somewhat overstates the odds of this leading to a total financial meltdown. Worst comes to worst, you pay people with IOUs for a week and then organize an "illegal" debt auction where bonds will sell at a modest premium to currently prevailing rates and ultimately the courts legitimize the option. But that will definitely be a kind of constitutional meltdown that will permanently shake confidence in the American financial and political system.