Three Not-So-Crazy Ways Out of the Debt Ceiling Crisis

Two are simple enough. The third one? Not so much

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Gary Cameron / REUTERS

The United States is in the midst of its first government shutdown in nearly 20 years, and the practical effects on millions of Americans are significant. Even more worrisome: the impending debt ceiling, which the Treasury Department estimates the U.S. government will reach on or around October 17th.

The debt ceiling is the statutory limit of allowable federal debt, currently set at $16.7 trillion. Up until about one hundred years ago, Congress approved every individual new bond issue, but early in the 20th century Congress began to expedite the process by simply creating a debt limit and allowing the Treasury Department to borrow as it sees fit any amount below that. More recently, politicians have been squabbling over the debt ceiling and essentially threatening a default. Nobody is sure what the outcome of a default would be, but financial markets–which depend greatly on U.S. debt as a source of liquidity–would likely freeze up.

The possibility that Congress won’t reach an agreement to raise the debt ceiling has gotten economists and legal experts thinking of ways to get around the debt ceiling without Congress’ approval. Here are three possible strategies:

1. The Trillion-Dollar Coin: This idea, first raised by Jack Balkin, a Professor of Constitutional Law at Yale Law School, takes advantage of a loophole in the law which allows the Treasury to mint platinum coins without limit. The purpose of the law is to allow the creation of commemorative coins, but there’s nothing in the law that would prevent the minting a coin of any value. Therefore, to get around the debt ceiling, Balking suggests minting two platinum coins worth $1 trillion dollars and then just depositing them at the Federal Reserve in order to write checks based on the value.

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2. The 14th Amendment: Another potential option is for the President to declare the debt limit unconstitutional because of in the 14th amendment. It states, “the validity of the public debt of the United States, authorized by law . . . shall not be questioned.” The 14th Amendment was written to prevent Southern congressmen from threatening to default on U.S. debt unless the Confederacy’s debt was paid off too. University of Baltimore Law Professor Garrett Epps has argued that this amendment basically makes the debt limit unconstitutional and would allow the Treasury to continue to issue bonds without Congress’ approval.

3. Premium Treasury Bonds: While the previous two strategies for obviating the debt ceiling were prevalent during the last debt-ceiling showdown, the idea of issuing so-called “premium” Treasury bonds is newer. The idea was first raised earlier this year by Matthew Levine at Dealbreaker. Understanding the idea requires knowing a little bit about how bonds are sold. Bear with:

Bonds have both a “par” value and often times a different price at which a bond is actually sold to the public. Normally this is because interest rates can change pretty quickly: Say I want to issue a bond for $100 at a 4% interest rate, but a few weeks later, when I actually get around to issuing the bond, interest rate rises to 6%. To sell my 4% bond will require selling the bond at a discount to par–somewhat less than $100. The opposite would happen if interest rates falls to 2%. If I’m selling a 4% bond in a 2% environment, I’ll be able to garner more than $100 in that environment.

So how does this apply to the debt ceiling? The debt ceiling law only applies to the face value of bonds issued, rather than the actual value of the money raised. So when past Treasury debt expries, the Treasury Department could simply roll it over into bonds with much lower face values but that bring in higher revenues and pay out higher interest rates, allowing the total debt of the U.S. to continue to rise while still staying within the debt-limit law.

(MOREThe First Economic Victim of the Shutdown)

And as Levine points out, this is something that, unlike the platinum coin scheme, governments around the world have resorted to strategies like this before. It was a somewhat similar scheme involving derivatives that allowed the Greek government to hide the true value of its debt from EU officials until its debt crisis a few years ago. In our imagined scenario, however, Treasury wouldn’t be trying to hide the debt from the public. It would simply be looking for a way to skirt a law that doesn’t make a lot sense to begin with.

The brilliance of the premium bond scheme is that unlike the 14th amendment or platinum coin scenario, there isn’t an obvious way that opponents of it could challenge it in court. As former Treasury Chief of Staff told the Washington Postone of the reasons the Obama White House has shunned the 14th amendment strategy is because it could be challenged in the courts, and the reason it avoided the platinum coin strategy is because the Fed might not play along. As for premium bonds, all we would need would be willing buyers for the bonds. And if recent history is any indication, that won’t be a problem at all.

91 comments
j45ashton
j45ashton

According to the Huffington Post the following GOP congressmen have indicated that they would vote for a clean CR.  This implies John Boehner is lying.  Just to prove his integrity & that he can be trusted, why doesn't he take a vote on a clean CR:

Rep. Pat Meehan (R-Pa)

Rep. Scott Rigell (R-Va.)

Rep. Jon Runyan (R-N.J)

Rep. Mike Fitzpatrick (R-Pa.)

Rep. Lou Barletta (R-Pa)

Rep. Peter King (R-N.Y)

Rep. Devin Nunes (R-Calif

Rep. Charlie Dent (R-Pa)

Rep. Frank Wolf (R-Va.)  

Rep. Scott Rigell (R)  

Rep. Michael Grimm (R-N.Y)

Rep. Erik Paulsen (R-Minn

Rep. Rob Wittman (R-Va

Rep. Frank LoBiondo (R-N.J.):  

Rep. Randy Forbes (R-Va

Rep. Jim Gerlach (R-Pa.):  

Rep. Leonard Lance (R-N.J

Rep. Mike Simpson (R-Idaho

Rep. Bill Young (R-Fla

Rep. Mario Diaz-Balart (R-Fla.):  

Rep. Richard Hanna (R-N.Y

Rep. Rodney Davis (R-Ill

Rep. Tim Griffin (R-Ark 

madscientistca
madscientistca

It seems like it would be more straightforward to steal one of those trillion dollar coins.  What would happen then, if one of those coins is stolen after the treasure has written a trillion dollars worth of checks against it?

DerickBranson
DerickBranson

If you ask me to rate the three options given here, I will first go with the 2nd one, then with the 3rd, followed by first. However, having said that I must also reiterate that a political consensus on the budget is need of the hour. I was going through some fact findings and saw that healthcare initiatives are always sidelined by the republicans right from 1940 by showing fund shortage. Why is it so? Healthcare benefits are intended for the benefits of the maximum number of US populace? Why are Republicans trying to halt the economy by not letting a pro-people initiative to work? It clearly shows that GOP is against any policy that is pro-people.

tsvskibum
tsvskibum

Here's a way of the government shut down/debt limit crisis: have congress do its job. Bring the bill to raise the debt limit and fund the government which has passed committee to the floor of the house whether or not it has the support of the majority of Republicans.  This Hastert Rule is preposterous on its face.  If a bill has enough votes to pass, then it should be voted upon.

michaelpetersmith
michaelpetersmith

I'd like to see the cost of issuing the premium bonds. The only thing keeping our current debt from sinking us is that we are paying such low rates - less than 2% overall last year.

blasterman1
blasterman1

So if the debt ceiling isn't raised, the President will have to prioritize payments as revenue is received.  The first priority is debt and interest on the debt.  The US will not default.  Second will be everything in blue states/districts.  The red tea party thinks the country would be great without government intervention so what if Obama stopped paying social security receipients in those states?  All he would have to do is prioritize the payments to blue state recipients.  Then everyone in places that support him gets their social security and no one in the red states/districts get anything.  The red states/districts would quickly realize just how important the US government is.  Of course they'd also be in their own little depressions with very high unemployment, no food support, no farm subsidies paid, no roads built or repaired, no home loans authorized (the 30 year loan didn't even exist until FDR created housing backstops supported by federal agencies), military bases moved out of them, no social security or medicare payments, etc.  I could go on but suffice it to say, those areas would be devistated.  At that point, Obama could not just demand an increase in the debt ceiling, a "clean" budget, but also higher taxes or whatever else he wants.

The house wants to play hardball but he's going to be the one responsible for making the funding decisions once they allow the government to hit the debt ceiling.

JackBeHumble
JackBeHumble

@UsuqMadiq - 

The ideal long-term solution would be for our government to pay down, and eventually pay off, our debt. But right now, congress cannot pass continuing resolutions, much less actual budgets to address the sections of our government that need to be funded each fiscal year.

First, congress and the senate need to plot a course over, under, around, or through the debt ceiling. Hopefully they can do this with speed and sanity.

Second, they need to pass funding for the government that will allow it to function. A continuing resolution will do that, but at the prices set by the last budget.

Third, congress needs to agree to steep cuts in all parts of our spending: entitlements, defense, operations, and social programs need to be included. The money we spend must be cut as much as possible, without crippling our economy, our national defense, or our ability to care for those most needy in our society. This is no easy feat, but it can be done.

If done properly, the budget will hopefully balance within 15-20 years. During that period, we will continue to raise the debt, so we will need to raise the limit so as not to default. Once the budget is balanced, our government will begin to pay down our debt.

dhlynch2
dhlynch2

I almost hope the left moves forward with one of these idiotic "not so cray" ideas.

if you think the unintended consequences of a failure to raise the debt ceiling would be bad. These would be worse. 

Further the blame would be clear. 


This president and aparently every progressive on the planet is econoically and apparently logically illiterate. 


allison.aa
allison.aa

Check out Article 14, Section 5 which gives Congress the power to enforce Section 4. Aside from the fact that this makes the debt limit Constitutional, it's the Supreme Court, not Emperor O, which gets to decide what's constitutional. Congress has a duty to ensure that the debt is serviced, not to raise the debt limit. Lew, and the President, need to be reminded that failure to service debt would be a violation of their oaths of office, an impeachable offense. Congress holds the cards, and the administration is bluffing.

KathyBanks
KathyBanks

The Republican party needs to take a long hard look at itself.  What does it stand for?  Moderate Republican values or extreme Tea Party Values.  These two are not really compatible and this incompatibility is tearing not only the Republican party apart, but also starting to dangerously make the administration of the USA unviable.  No single party can accommodate such extremes of ideals.  What needs to happen is for the Republican party to have the courage for their own good and the good of the country to break away from the Tea Party.  The Tea Party would become a third party of extreme right wing views.  The more moderate Republican party would attract more moderates to it who have abandoned the party due to the extreme right wing faction.  Currently the Republican party is being held to ransom by its extreme right wing.  They are being bullied by a factional group from within.  It's really the only viable option for a long term solution to this brinkmanship that is increasingly making the country ungovernable.   

YanceyWard
YanceyWard

It is a crazy idea to try to do an end-around the legislative branch in this regard.  However, we may have reached the point in this republic were crazy is what we deserve as a people.  If any of these ideas are implemented, it will be less than a generation before we can simply dispense with the fiction of having a legislature of the people.

manapp99
manapp99

The people hurt the most by a government shutdown and/or a government default are the rich of the world. The ones that own businesses doing business with the feds. The ones that loan money to them. Sure, the little people are hurt as well but the real hit is to the well heeled. Why do Democrats work so hard to make sure the big banks and wall street are not hurt? Seems there is real panic to not hurt the 1%. 

manapp99
manapp99

Recently reported is the fact that the federal government is taking in record dollar amounts in revenue. Deficits are still measured in the hundreds of billions. There have been no real spending cuts in DC ever. One side demands a clear path to borrowing more without any restrictions. One side wants to raise it only if the affordable care act is impacted. No one is seriously talking about tax reform or a viable energy policy or reducing real spending. The people, who will ultimately pay the bill, have been goaded into taking one side or the other. Fact is that when this settles the politicians will retain their elite existence and we will retain our obligation to pay for their excesses. They will win no matter how this goes and we will lose as we are going to be on the hook for more US borrowing one way or another.  

ChristopherHart
ChristopherHart

Lots of hypocrisy by the MSM (Time Magazine more than most).  As if negotiating spending cuts and policy changes in exchange for raising the debt ceiling is as scurrilous at Obama says; yet the press is promoting that, yes promoting it.  Obama in 2006 voted against the debt ceiling increase absent changes in policy.  Hello!?!?  60% of debt ceiling increases have been after concessions and spending cuts are the most logical concessions.  Obama is in the wrong here, by custom, by rhetoric, and by any standard of decency.  Yet the press won't report at least the historical truth regarding Obama's vote in the past on the debt ceiling or debt ceiling settlements in the past.  


But those who ignore the truth usually lose before it's implacable ascent; so ... be ... it.

Ray_CT
Ray_CT

Oh wait ... I have an addition...

I have ttwo simple ways to end the shut down problems, the war problems, the NSA problems and more...

1) Impeach Obama

2) Impeach Obama

and if those two fail ...

3) Elect a President who swears on his mother - to CLEAN HOUSE in the Executive branch!

Ray_CT
Ray_CT

I have three simple ways to end the shut down problems, the war problems, the NSA problems and more...

1) Impeach Obama

2) Impeach Obama

and if those two fail ...

3) Impeach Obama

wootendw
wootendw

"More recently, politicians have been squabbling over the debt ceiling and essentially threatening a default."

Nice try, Christopher but this 'default' stuff is just scare talk. There is more than ample revenue coming into the Treasury to pay its bondholders and they are FIRST IN LINE to get paid.  Some other expenditures would have to be cut but cutting these would NOT constitute default.  The so-called 'debt ceiling' is just a credit limit - like the ones credit card companies establish for cardholders.  If there were any danger of default (and there isn't) the last thing you would want to do is raise the credit limit because raising it means MORE DEBT.  And if the government cannot service the debt it has now, why would it be able to service more?  'Failure' to raise the debt ceiling would amount an instantaneous balanced budget - which would be a good, responsible thing to do, although very painful for some dependent on taxpayer money.  If I really believed Congress would refuse to raise the debt ceiling, I would put all my money into long term Treasuries.  So stop trying to pull the wool over your readers' eyes, Christopher.  There will be no 'default' on Treasury bonds.

ClintonWeir
ClintonWeir

@blasterman1 "the President will have to prioritize payments as revenue is received"

Translation:  The President will have to ignore the constitution, break the law, and probably face impeachment by the jokers in the House who forced him into the no-win situation.

michaelpetersmith
michaelpetersmith

@JackBeHumble We are in a state now where cutting the budget alone won't do the trick. Much of it cannot be cut by law. You'd have to gut discretionary spending to balance the budget on cuts alone. Trimming by 10%, 20%, even 30% won't do it. To cut enough so we could actually generate a surplus to pay down the debt? A pipe dream.

We need to cut spending, sure. But we also need more revenue. Federal tax revenue as a percentage of GDP is at its lowest point in over 50 years. We can increase revenue by increasing GDP, but this shows the need to increase the tax bite.

I personally would like to see most tax exemptions eliminated, and most of those remaining capped, and rates left alone or reduced. But make no mistake: revenue-neutral tax reform is *not* what we need now. 

I don't care if we ever balance the budget, but I'd like to see the cost of servicing our debt fall to under 10% of the federal budget by the end of the decade. If we do nothing, it could rise to 50% by the end of the decade.

tom.litton
tom.litton

@JackBeHumble The problem with steep cuts is that it will hurt the economy, reduce revenue, and not lead to that much debt reduction.

A better idea is to concentrate on the GDP side of the equation.  Invest in anything that we will need in the next 10 years or so, and anything that will make us more competitive, since the interest rate is very low.  When the economy recovers, then reduce spending and pay off the debt.  

It helps the economy now and prepares the economy for the future. 

tom.litton
tom.litton

@manapp99 I would like to hear the logic on that one.  It would even be better to see actual evidence.  

It's obvious the 800k federal employees are hurt, along with everyone that depends on federal programs (which tend to be the middle class and poor). 

If the rich were being hurt significantly more than those people, then i would expect the stock market would be going down and they would have to take more and more money out of it. 

tom.litton
tom.litton

@ChristopherHart My guess is that he would negotiate if and when republicans offer something worth negotiating over. 

Or do you really think he will negotiate to damage a program Democrats have spent decades trying to get passed?

JackBeHumble
JackBeHumble

Where is the list that shows what is where in the line? At what point do Social Security recipients, Members of Congress and the President, Government Contractors, Active Military members, Disabled Veterans, or Park Rangers not get paid? When all of the above do not get paid, what happens when they tell their debtors they cannot pay their bills?

NedReid
NedReid

@wootendw Being "first in line" to get paid doesn't carry much water with this administration. GM "first in line" shareholders got stiffed in the bankruptcy while the unions were saved. The taxpayers took it in the shorts, too. Not to mention this administration's repeated attempts to frighten markets and enrage voters whenever an attempt to put the brakes on debt is pressed by the Republicans -- such as in the sequester kerfuffle earlier this year, and the current budget and soon-to-be debt ceiling fights.

JoshSoffer
JoshSoffer

@wootendw Care to name any established economists who support your view that a failure to raise the debt ceiling wouldn't tun the risk of a worldwide Lehman-like panic?

manapp99
manapp99

@tom.litton @ChristopherHart Well they did offer getting rid of the special exemption for congressional employees and postponing the individual mandate for the same one year period that the business mandate was postponed. That was in exchange for opening the government. The Dems said no deal. 

dhlynch2
dhlynch2

@tom.litton @Ray_CT 

charges are easy, there are innumerable ways he has flouted the law - even his own law. 

As a trivial example he never had the authority to unilaterally delay any aspect of PPACA. 

The hard part is political support. There is nothing this president has done that is politically egregious enough to garner popular support for impeachment. 

Bill Clinton lied under oath, and he lied right to our faces. That was not politically sufficient.

Attemption to impeach Obama is political idiocy.  





wootendw
wootendw

@NedReid @wootendw  Holders of Treasuries include foreign governments and central banks, billionaires, millionaire clients of Goldman Sachs and JPM, the Federal Reserve, and other very powerful people.  They will get paid.  GM WAS a private company.

dhlynch2
dhlynch2

@JoshSoffer @wootendw 

There is a substantial difference between the widespread beleif among economists that the sudden imposition of essentially a balanced budget on the federal government would prove tortuously difficult, and is just a bad idea, and the presumption that it would cause global panic. 

There is ample evidence despite the meme that the failure to bailout lehman had little or nothing to do with the financial crisis. 

The financial markets were reeling under the loss of 11T in value due to the housing crisis. 

NOTHING can fix that after the fact. 

the fact that government did something does nto mean it did any good. 








wootendw
wootendw

"Care to name any established economists..."

Very few 'established' economists, including those employed by our government and central bank, foresaw the crash of 2008.  Now many of them claim it was because they didn't bail out Lehman - which is rubbish.

JoshSoffer
JoshSoffer

@wootendw And you'll notice that a deal will be cut just before the October 17 deadline. That's because the Republican leadership doesn't buy your idea that there's no risk of financial panic if we go over the deadline.

dhlynch2
dhlynch2

@tom.litton @manapp99 @ChristopherHart 

PPACA appears worse the further we go with it.

Democrats are better off letting republicans take responsibility for killing it now, before it becomes even more of an albatross. 

No system of price controls anywhere ever has actually worked. 

This will not either. 





tom.litton
tom.litton

@manapp99 @tom.litton @ChristopherHart First, delaying the individual mandate would make the cost of healthcare skyrocket unless you basically delay the entire law.   Why would they do that when the Dems are depending on people liking the law once they have experience with it?

Second opening the government isn't something the dems want anymore then republicans (or are you saying the republicans couldn't care less about the economy or people's jobs?).  Especially since the republicans are by and large getting blamed.  They would have to put something on the table that is equal to what they are asking for.  Maybe revenue increasing tax reform in exchange for repealing the medical device tax for example. 

tom.litton
tom.litton

@dhlynch2 @tom.litton @Ray_CT I'm not a lawyer, but that doesn't sound impeachable anymore then congress passing an unconstitutional law is an impeachable offense.  If the courts decide he doesn't have the power to delay the provision, then the decision will become null and void, and the court will give further instructions.

I will be interested to see how the court case turns out.  However, i suspect it won't amount to much.  The president has the power of enforcement and pardons.  And i would be surprised if the law doesn't have some provision for waiving the requirement.  Any of those could be considered to imply the power to delay the provision.

tom.litton
tom.litton

@dhlynch2 @tom.litton @wootendw I agree with your description of economists.  However, that doesn't mean their models are useless.  

In my mind, there is still a large knowledge gap, but that doesn't mean they don't understand anything.


I'm curious as to what your analogy refers to.  I know the Austrian economists have made a few predictions lately that have been way off (monetary expansion being inflationary, and austerity being expansionary).  

tom.litton
tom.litton

@dhlynch2 Sure you can.  Look at what happened on the past, make a prediction for the future, and see if it comes true.   It's the essence of the scientific method.

What you can't do, of course, is control or repeat the experiment.

dhlynch2
dhlynch2

You can not apply the scientific method when you can not conduct a controlled experiment to validate the results. 


Evidenced based is not the same as following the scientific method. 


dhlynch2
dhlynch2

@tom.litton @wootendw 

Economists are notoriously bad at predicting anything. 

They analyze the past and try to discern trends and develop models based on that. 

Of course a substantial portion of modern political economics flies in the face of that very historical data. 

to use your analogy economists are encouraging us to jump off cliffs, assuring us with keynesian certainty that gravity will not work in this instance, even though it always has in the past. 






manapp99
manapp99

@tom.litton @manapp99 @wootendw The problem with economic predictions is the same problem with horoscopes. They are entirely dependent on events that have not happened yet. Unforeseeable events are like unintended consequences. They are impossible to know for sure and they often make all the difference in the world. Look at any financial headlines site, like real clear markets, and you will see predictions about financial events that vary widely from economist to economist. Same set of facts. Same data yet extremely different interpretations. 

tom.litton
tom.litton

@manapp99 @tom.litton @wootendw Even if you don't consider it a science, it still follows many of the same principles (like the scientific method).  

Granted it's more difficult then physics (because it's almost impossible to set up a control), but it's still evidence based.

tom.litton
tom.litton

@wootendw Just because one area of macro economics needs more research (bubbles) doesn't mean that they can't predict whether a specific action by the government would be good or bad.

By that logic just because nobody knows how gravity really works, it's safe to jump off a cliff.

dhlynch2
dhlynch2

@wootendw @JoshSoffer 

whatever happens it will be bad for some and good for others. 

Small gradual deflation is good for consumers, but we have not seen it in a century.  





wootendw
wootendw

@JoshSoffer @wootendw  That depends on what you mean by 'financial panic'. A sudden balanced budget would bring about deflation. Deflation is bad for commodities (including oil and gold), jobs and people in debt.  But it is good for bonds and the dollar.