The federal government is Constitutionally forbidden from repudiating its debt under the 14th Amendment, said the Supreme Court about 75 years ago:
The government's contention thus raises a question of far greater importance than the particular claim of the plaintiff. On that reasoning, if the terms of the government's bond as to the standard of payment can be repudiated, it inevitably follows that the obligation as to the amount to be paid may also be repudiated. The contention necessarily imports that the Congress can disregard the obligations of the government at its discretion, and that, when the government borrows money, the credit of the United States is an illusory pledge.
We do not so read the Constitution. There is a clear distinction between the power of the Congress to control or interdict the contracts of private parties when they interfere with the exercise of its constitutional authority and the power of the Congress to alter or repudiate the substance of its own engagements when it has borrowed money under the authority which the Constitution confers. In authorizing the Congress to borrow money, the Constitution empowers the Congress to fix the amount to be borrowed and the terms of payment. By virtue of the power to borrow money 'on the credit of the United States,' the Congress is authorized to pledge that credit as an assurance of payment as stipulated, as the highest assurance the government can give, its plighted faith. To say that the Congress may withdraw or ignore that pledge is to assume that the Constitution contemplates a vain promise; a pledge having no other sanction than the pleasure and convenience of the pledgor. This Court has given no sanction to such a conception of the obligations of our government.
First, let's take a look again at what the 14th Amendment actually says:
The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.
As I argued yesterday, there is nothing in the plain text of the amendment that requires Congress to actually repay its debt -- only to acknowledge its validity. Properly understood, the amendment merely asserts that the debt issued in accordance with an act of Congress is the federal government's debt, while debt issued by illegitimate authorities is not. There is nothing in it that forbids Congress from repudiating, in another act of law, the debt it previously accrued, or to restructure its debt, renegotiate the payment schedule, or otherwise modify its obligations.
Nothing in the main text of the Constitution, either, forbids repudiation: Article I, section 8 merely grants Congress the power "To borrow money on the credit of the United States." However, given the Court's decision in Perry v. United States, it is now the case that there is a Constitutional obligation to repay debt. In other words, the requirement to pay debt is now a Constitutional requirement, and to repudiate debt is a necessarily illegitimate and unconstitutional act.
This is a profound problem.
In 1935, the Court essentially acted to shackle the republic to its finances -- forever. Our debt situation is, at the moment, bearable, but painful: if we act to balance the budget now, we will only need to run a primary surplus of $400 billion or so annually to amortize our debt. But we're not going to balance our budget now. Most likely, we're going to settle for relatively minor cuts and tax hikes paired with a debt ceiling increase that will result in an immediate credit downgrade by the major ratings agencies, followed by an increase in borrowing costs. That increase will widen the deficit (probably erasing the savings made by the cuts Congress previously agreed to) and make our debt situation worse. Very likely, we will enter a credit-downgrade spiral that will be progressively harder and harder for us to climb out of.
No matter how unreasonable or even mathematically impossible it becomes to finance our debt, we will never be able to repudiate it.
The only way to escape the impossible situation we wil find ourselves in, therefore, will be to repudiate the Constitution itself.