Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul.

One curious thing about the debt limit debate is the virtual silence of the foreign policy establishment. It’s curious because the potential for a default on our debt owing to Republican intransigence in Congress is a very big foreign policy issue indeed.

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This becomes obvious when one realizes that foreigners own close to half of all Treasury debt held by the public, and a lot of it is owned by countries –- China, in particular –- that are America’s most aggressive competitors on a wide variety of political, economic and military issues.

As Treasury data show, at the end of April, foreigners owned more than 46 percent of all Treasury securities held by the public. China is our largest creditor, with a fourth of all foreign-held debt and 12 percent of the total.

Treasury Department

Not surprisingly, Chinese officials have long expressed concern about the quality of Treasury debt, for both economic and political reasons.

Last year, the Dagong Global Credit Rating Company, a China-based credit-rating agency, downgraded Treasury debt, and last week it issued another warning, citing fears about the “actual ability and intention to repay its debts” of the United States. Chinese government officials have also publicly expressed concern about how the debt limit negotiations may affect them.

The situation is reminiscent of debates during the founding of our republic on the role of debt. Alexander Hamilton, the first Treasury secretary, was adamant that the United States must never default on its foreign debts. As he wrote in Federalist No. 30, “who would lend to a government that prefaced its overtures for borrowing by an act which demonstrated that no reliance could be placed on the steadiness of its measures for paying?”

A key reason why the Chinese own so much of our debt is that they are risk-averse and would rather get a low rate of return on Treasuries, even though higher rates are available on corporate bonds and other securities, because the Treasuries are assumed to have zero risk of default and the market for them is the largest and deepest in the world.

We don’t know how the Chinese will react if their faith in Treasury securities is shattered by a default –- and remember, a default occurs the moment the precise terms of a loan are not met and either principal or interest is not paid exactly when due.

The idea floated by Republicans such as Representative Paul D. Ryan of Wisconsin, the chair of the House Budget Committee, that the Chinese won’t mind if there is a “technical default” and they get their money a few days late is total nonsense and gross self-delusion.

In April, J.P. Morgan surveyed its clients that are large buyers of Treasury securities to see what their reaction would be to a temporary default resulting from failure to raise the debt limit. It found that foreign buyers would likely demand a 55-basis point increase in interest rates (0.55 percentage points) and that this increase could be permanent.

That is consistent with the experience in 1979 when the Treasury defaulted for two weeks over a debt limit increase delay and technical problems with its computers. It caused a 60-basis point rise in interest rates that lasted for years, according to academic research.

More worrisome to Morgan’s analysts is the possibility that foreign investors may permanently reduce their Treasury holdings. The analysts note that foreigners had previously been large buyers of securities issued by Fannie Mae and Freddie Mac. But they reduced their holdings by 40 percent after these agencies were placed under Treasury’s conservatorship.

It goes without saying that national defense is a core government function, one that has long included America’s economic interests, such as protecting the supply of oil. It would be myopic in the extreme to view the flow of oil to the United States as a legitimate national security issue but to view the flow of foreign capital into Treasury securities as a matter of no particular concern.

For these reasons, many legal scholars, like Jack Balkin of the Yale Law School, view the debt limit as a national security issue that would justify a presidential response equivalent in magnitude to what would be justified by a foreign invasion or an oil blockade. Sanford Levinson of the University of Texas law school notes that Franklin D. Roosevelt justified his extraordinary actions on the economy in 1933 on the grounds that the economic crisis was as important as war.

Although this view has been rejected by the Treasury, Professors Balkin, Levinson and other legal scholars assert that if Congress adamantly refuses to raise the debt limit until default is the only option, then the Constitution gives the president the authority to act unilaterally. This could be done under Section 4 of the 14th Amendment, which says the “validity” of the public debt “shall not be questioned.”

Even Laurence Tribe of Harvard, who rejects the Section 4 option, says failure to raise the debt limit would empower the president to take actions that would normally be illegal, such as impounding funds in order to prioritize debt payments.

Throughout our history, great presidents have pushed the limit of what the Constitution permitted when circumstances demanded it –- as when Thomas Jefferson bought the Louisiana Territory from the French despite lacking any constitutional authority to do so.

A debt crisis resulting from Congressional irresponsibility may force the onetime constitutional law professor Barack Obama to do the same.

This post has been revised to reflect the following correction:

Correction: July 19, 2011

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