MORGAN STANLEY ECONOMIST: If We Breach The Debt Ceiling, Jack Lew Must Decide Which Law To Break

According to Morgan Stanley top economist Vincent Reinhart, the question becomes straightforward: Which law must the Secretary of the Treasury break?

In a column for DealBook, which is adapted from one of his notes to clients, he explains the choice facing Treasury Secretary Jack Lew:

If the Treasury is unwilling to stretch the definition of extraordinary measures, on the day that the Federal Reserve predicts that the Treasury will run out of cash in its account and the Treasury is bound by the debt ceiling, it suspends all payments and awaits instructions from the Treasury. As a result, the government's principal economic officials will face the prospect of violating one of these three laws:

1. The Second Liberty Bond Act of 1917 that establishes the debt ceiling;

2. The Federal Reserve Act that prohibits the Fed from lending directly to the Treasury; or,

3. The 14th Amendment of the Constitution that holds that the debt of the United States government, lawfully issued, will not be questioned.

They have to break a law. At the end of the day, officials will avoid violating the Constitution by indicating that they have been given inconsistent instructions and are obeying the one with the most important precedent.

Basically in Reinhart's formulation, Lew will opt to break the debt ceiling law, citing constitutional obligations to continue servicing the debt.

And then of course we enter into level never-neverland with respect to the budget.