Do something you Dumdums; the Debt Ceiling approaches.
Is this the solution?
It’s that time again—no, not the time when Dry January becomes F-It I Will Have that Whisky January. Rather, it’s another instalment of Debt Ceiling Crisis Time. Unlike not-so Dry January this is happily not an annual occurrence—but rather only when the stars align can we experience this magical season. The stars in question appear to be the United States running up against its credit limit while—and this is the critical component—there is some degree of divided government with the Republicans holding some degree of power in the Congress and a Democrat occupies 1600 Penn Ave. The first condition was met twice during the last administration when the other condition did not hold. So, for some reason[1] the limit was suspended. So here we are, once again looking down the gun barrel of an American sovereign default. Despite the brinksmanship—I assume that eventually everyone will come together and agree to raise the limit, but not without maximum Sturm und Drang and concomitant chaos and damage to the finances of the United States and the global economy.
The so-called Debt Ceiling is a statutorily defined limit on debt incurred by the United States. While much of the resistance[2] is framed around issues of keeping runaway spending in check—the Debt Ceiling has only a secondary relationship to spending as it has nothing to with appropriations. To think of it on an accrual basis, the appropriation is the real spending—limiting the Debt Ceiling only hinders the Treasury from settling our big national payables account. To put it even more simply in household terms, the United States has bought a new 70” 4K OLED TV, paid its rent, and bought groceries on the credit card—but now some are saying we shouldn’t pay the credit card bill because the 70” 4K OLED TV was an extravagant purchase and we shouldn’t buy a new Dolby Atmos surround sound system in the future.[3] Charitably, you could say that the members of Team Let’s Not Pay our Bills is holding out to bring everyone to the table to agree to get future spending down before they agree to settle debts. But to believe that would require you to believe we are in a world where members of Congress will take a serious bite out of spending on defence and entitlements like Social Security and Medicare.[4]
Now, the Democrats could have dealt with this issue at the end of last session when they controlled both houses of Congress. They did not. Presumably they didn’t do this prior to the election because they didn’t want to be portrayed as Socialist Spending Addicts[5] by a Republican Party that has once again discovered fiscal probity as one of its guiding principles. But they could have done it in the Lame Duck surely? Of course they could have, but then they would have deprived themselves of the opportunity to point out that they are the reasonable ones and their political opponents are pointing a gun at the Full Faith and Credit of the United States.[6]
But we are here now and the disciples of True Conservatism have decided that the Conservative-est thing to do is to welsh on our debts. I will not belabour this much more, but the party of personal responsibility and fiscal probity[7] has decided the best course of action is to dishonour contractual obligations and to not pay what is owed on monies that have already been spent—putting the US into default. SMDH, as the kids say.[8] I have seen proposals to avoid a full default by going through and prioritizing what liabilities to pay now and which ones can be paid later—I am no lawyer but I am pretty sure that is Chapter XI Bankruptcy. Furthermore, playing games like this runs against the spirit and letter of Section 4 of the 14th Amendment of the Constitution: “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.” Let me repeat: shall not be questioned. If you are raising doubts as to whether you will pay a debt you have incurred, you are questioning the validity of that debt.
Look, I am pretty sure that the limit will be raised or suspended or something once an appropriate[9] amount of time has elapsed, and everyone has gotten their breathless cable news appearances in and scared up a few million bucks with yet more breathless fundraising emails. But the potential for damage is immense. When this happened in 2011 S&P downgraded the US’s rating for the first time in ever, even though the Ceiling was eventually raised. This triggered a market selloff and it is worth noting that markets are pretty, pretty volatile and tenuous right now and a similar event would be extremely not good. We do not need this added chaos right now as the Fed walks a tightrope towards the soft landing which we all desperately want.
Alas, here we are—which leads me to a scheme that is so crazy that it just might work. MINT THE COIN. Long story short, the Treasury is legislatively empowered to mint platinum coins in any denomination it chooses. With that in mind, a group of whackos who are clearly among the more clearheaded people talking about this issue right now have proposed using a law for the minting of collector coins to create a $1tn platinum coin the Treasury can deposit at the Fed. While this coin certainly sounds like the McGuffin in a new instalment in Nicolas Cage’s National Treasure franchise—it would presumably allow the Treasury to skirt this entire issue and go on to settle the liabilities that are coming due almost magically by depositing the coin in our national checking account. Would this have unforeseen monetary consequences? Maybe, but this would just put a $1tn dollar deposit liability on the Fed’s balance sheet instead of an equivalent sum in bonds—so I presume it wouldn’t make much difference.[10] Plus, think of the heist movies[11] this would inspire!
Maybe minting the coin isn’t what needs to be done. But something does. Money is not banknotes; it is not a coin; it is not securities. Money is trust. Right now a band of dangerous idiots is actively working to undermine our money by saying almost explicitly that the most important bank in the world cannot be trusted. The coin is simply a tool to say that the Treasury, the Fed, and fundamentally the United States can be trusted. This trust is a bedrock of the entire global economy. If we don’t do something firm and pretty quickly—we are gonna chip away at that bedrock. All this at a time that really nobody can afford it. Get your act together dumdums—this is both entirely unnecessary and dangerous.
[1] Hmmm, what reason could that be?
[2] At least nominal resistance
[3] Except they also bought the TV, love watching the TV and are super stoked to buy the stereo too.
[4] To misuse the language of Economics, this would be a highly stylized scenario. But frankly, the assumptions do not hold.
[5] This would be an extremely bad faith accusation by a party that has about the same predilection for spending and furthermore, as we have seen above, this isn’t about spending.
[6] The downside of this is that in order to have this opportunity they had to let it happen.
[7] Wink
[8] Do they? I don’t know any.
[9] “appropriate”
[10] Important caveat: I am NOT expert in monetary economics. Meta-caveat: I am pretty sure I am more expert than 99% of the membership of the House of Representatives.
[11] One of the best genres of movies. This is my opinion but it is also a fact.
