Until I see the words “we will agree to more revenue” coming out of a Republican’s mouth, I’m inclined to think that there’s a far greater chance of the debt limit being reached without agreement than this sudden, $4 trillion grand bargain that has returned to the headlines. Barack Obama and some excitable media types may want this to happen; it doesn’t mean anyone, really, will agree. And the Pew poll today on entitlement benefit changes must be a little chastening, prompting the “story overshoots the runway” walkback.

So I’m interested in this report looking at Treasury’s options after August 2. It’s important to note that none of these options are particularly desirable, and none of them may be particularly legal. If the Congress statutorily committed the Treasury to paying debts, then breaking or delaying any one of them, to bondholders or Social Security beneficiaries or veterans or anyone else, has less than full legality.

We have confirmation here, by the way, that the Constitutional option is being looked at as a solution by Treasury.

But behind the scenes, top Treasury officials have been exploring ways to prevent a financial meltdown that would be triggered if the government were unable to pay its bills on time, sources told Reuters.

Treasury has studied the following issues:

• Whether the administration can delay payments to try to manage cash flows after August 2

• If the U.S. Constitution allows President Barack Obama to ignore Congress and the government to continue to issue debt

• Whether a 1985 finding by a government watchdog gives the government legal authority to prioritize payments.

The Treasury team has also spoken to the Federal Reserve about how the central bank — specifically the New York Federal Reserve Bank — would operate as Treasury’s broker in the markets if a deal to raise the United States’ $14.3 trillion borrowing cap is not reached on time.

Just because Treasury is looking at the 14th Amendment does not mean the President is ready to invoke it. White House spokeswoman Amy Brundage tells Reuters in this piece, “Despite suggestions to the contrary, the 14th Amendment is not a failsafe that would allow the government to avoid defaulting on its obligations.”

But, as Matt Yglesias writes, all of these things have a tinge of illegality to them. All appropriations are binding on the federal government. Bondholders deserve their money from a legal standpoint and so do Social Security beneficiaries. A failure to increase the debt limit will trigger something that isn’t totally legal, because 45% of the total obligations in August would not have a revenue source, according to calculations from the Bipartisan Policy Center. Alternatively, Geithner and his confreres could interpret the Constitution in such a way that allows debt to be issued. This could cause a Constitutional crisis and a court fight, which could have a negative impact on the country’s creditworthiness. But SO WOULD payment prioritization, or IOUs, or whatever other trick Treasury would have to pull out of their hat. One major problem is that Treasury makes 3 million automatic payments through computers every day, and they would all have to be reprogrammed. What if that doesn’t work and a payment gets made illegally, under the debt limit statute? There are a lot of gray areas here.

Jack Balkin says that the President should not threaten to declare the debt limit unconstitutional; I respect his take, though I’m not sure I totally agree. But, he adds, in the midst of a crisis, if Congress fails to pass an increase in the debt limit even after the markets start to melt down, if they believe it to be a purifying fire, then the President has a Constitutional duty to use inherent emergency powers and invoke the 14th Amendment. Well, that’s what’s really going on here. And I think we can get to that emergency stage pretty quickly, when you look at Treasury’s options.

David Dayen

David Dayen