The recent debt ceiling standoff gave a glimpse into just how
catastrophic a federal default would be for the US economy
After weeks of stalemate and more than 24 hours of delay, the
Senate finally voted last night to raise the debt limit and
averted potentially catastrophic default.
This would surely be on the order of the 2008 financial
crisis, and possibly worse,
but this isn't the first impasse the federal government has had
over the debt limit. In fact, the US has faced very similar
crises in the past, most notably in 1995, 2011 and in 2013. The
stakes are higher than ever, as the ceiling approaches closer to
$30 trillion for the first time in history.
We're essentially throwing a gigantic Molotov cocktail into
our own house. And it's the only house that we live in.
A bipartisan agreement to raise the debt ceiling is the easiest
way to end the crisis. But there are other solutions to breaking
the standoff, including a $1 trillion coin that has gained
more traction in recent years.
A trillion dollar platinum coin? What is that it sounds like the
setup to a heist movie, not something that the United States
Treasury Department ought to be doing.
It's really a gimmick. And what's necessary is for Congress
to show that the world can count on America paying its debts.
This is a silly solution to a silly problem. But as Joe
Weisenthal and Paul Krugman and a number of other folks are
talking about, this is actually a serious solution that we
should take seriously because it can help us to essentially avoid
the political football that is being played with the debt
ceiling.
So what exactly would happen if the US government fails to raise
the debt ceiling and can a $1 trillion coin really put a stop
to the crisis? As of October 2021, the US government is
sitting in more than $28 trillion of national debt. This
amount is accrued when the US government spends more money
than it makes from taxation. For instance, in 2020, the federal
government reported a revenue of $3.4 trillion, but spent over
$6.5 trillion in the same year. To cover the cost, the
government borrows money from individual investors in various
financial organizations in the form of bonds.
Let's say a person buys $1,000 bond, they get a piece of paper
in return for $1,000. And then what the federal government
promises to do is pay a certain amount of interest on that
periodically, and then after certain amount of time, repay
the $1,000. And so what the person gets in return for that
piece of paper is these interest payments, and then eventually,
their full principal back.
The debt ceiling refers to the maximum amount of money the US
Treasury can borrow in the form of bond sales. Over the years,
the debt ceiling has seen an exponential increase as the
national debt continues to climb. In 1993, the national
debt limit set at $4.37 trillion, or over $8 trillion,
when adjusted for inflation. By October 7, 2021, the US Senate
would approve a bill to temporarily increase that limit
to about $28.8 trillion.
What used to happen was that Congress would have to attach an
authorization to every single bill that required some amount
of borrowing or taxing or spending. And as you can
imagine, that was super annoying. Sometimes Congress
would overestimate the amount of money that a particular bill
would need, sometimes they would underestimate it. But by
creating this quote unquote, debt ceiling, this broad
authority for Treasury to borrow actually it's simplified the
whole process.
Once decisions are made, we have to pay the bills that come from
those decisions. And so to place an arbitrary ceiling on our debt
and to create periodic crises, manufactured crises that really
placed our economy and our financial system at risk,
especially now that we're recovering from the pandemic in
a fragile way. I consider this irresponsible.
If the government fails to extend the debt ceiling whenever
it is needed, the Treasury will no longer be able to raise the
funds to pay its obligations. This results in what's known as
a default, which could leave severe consequences on the
economy.
There's no question it would be terrible. A lot of the global
financial system depends on treating US Treasuries as
basically without risk and if the United States does not make
good on its commitments on time, that premise is called into
question. The consequences could be quite dire.
We would no doubt see, the stock market would react the bond
market would react. If it went on for more than a day and bond
market started to get the impression that indeed the US
government was not actually going to make its interest
payments on time, it would surely be catastrophic.
Even the simple threat of a default is enough to leave dire
consequences. A similar standoff in 2011 led to significant
market volatility as well as a downgrade of the country's
credit rating.
One worry here is that even if we do not default that maybe we
call into question the perfect risk free status that we
traditionally enjoy, and maybe cause financial institutions and
others to think about us in ways that are slightly more risky
than they have thought about us before.
The easiest solution to any debt ceiling crisis is a bipartisan
agreement. Both the Democrats and the Republicans realize the
threat of a default on the US economy and agree to raise the
debt ceiling as they have done for decades. But that isn't the
only solution. The debt limit can also be raised by a process
known as budget reconciliation. Created in 1974, this process
can expedite the passage of certain tax spending and debt
limit legislation. What would otherwise require a 60 vote
majority in the Senate to pass would only require 51 votes or
50 votes plus the vice president as the tiebreaker. It sounds
simple enough. But whether it's realistic is another story.
It is not a solution that the current administration and
Congress at present appears to want to have to use. It's
procedurally very complicated. There are some folks that
believe that maybe it's just too difficult to actually implement.
The reason they're hesitant to do that, it seems is that it
forces them to specify a dollar amount raised to the debt limit.
In the last decade, we've moved to suspending the debt limit for
certain periods of time. And I think congressmen like that
better, because it doesn't give their political opponents a
number to stick into a political act. If Democrats move through
reconciliation, they'll have to stick a number into that law.
And that number is likely to be over $30 trillion now, and so
they're worried about the way that that looks, and the way
voters will judge them for that.
The remaining solutions get a bit more radical. The president
can potentially use the 14th amendment to increase the debt
ceiling by themselves. It states the validity of the public debt
of the United States authorized by law shall not be questioned.
The debt limit is specified by statute. So there's no question
that the President could change statutory language on his own
just by citing the 14th Amendment of the Constitution.
That would totally up end our whole constitutional order.
That's not realistic.
Congress has made it really clear through their actions over
the past years, that they consider it in their purview to
raise the debt ceiling. That in and of itself suggests that if
the President were to say no, no, no, it's under my purview to
raise the debt ceiling, you create a crisis about powers in
the executive branch versus powers in Congress.
Then there is the idea of minting a trillion dollar coin,
which was first discussed during a similar crisis in 2011.
Generally, the Federal Reserve determines when and how much
money the Treasury Department can print. But some scholars
identified a law in 1997, that allows the treasury secretary to
mint and issue platinum coins in whatever denomination and
quantity.
The US Treasury has an account, like almost like a checking
account at the Federal Reserve that might surprise you. But
like, literally, you can go to the Federal Reserve's financial
statement, and see how much the US Treasury has deposited at the
Federal Reserve and can actually, in a sense, write
checks on that account. So US Treasury could mint its trillion
dollar platinum coin and deposit it at the Federal Reserve. And
then the US Treasury would effectively have a checking
account with an extra trillion dollars in it that they can then
use to pay their obligations.
Whether it will actually be effective depends on who it is
you ask.
A trillion dollar platinum coin, what is that it sounds like the
setup to a heist movie, not something that the United States
Treasury Department ought to be doing. And I think the fact that
it strikes people as so outlandish, is not just a small
little flaw. It's a real problem, because the Treasury
Department depends on confidence of global investors and of the
American people. And if it seems to be playing strange games, it
could seriously erode that confidence.
It's a way to get round political gridlock. It's not a
way to run a country. It is not a way to run the kind of
sophisticated financial system that we have today. This is not
a way to assure the governments of the world and the world
economy that we are in fact as risk free as we are supposed to
be. This is not the way to do it. But in the absence of other
solutions. It's certainly a plausible way forward.
As frightening as default sounds, experts reassure that
it's quite unlikely to happen anytime soon.
I would suggest and argue and hope that default is unlikely,
that the debt ceiling is being used as a kind of naked
political leverage technique without necessarily having any
conditions attached to it. That being said, there is still hope
that our political leaders will do what is right and stave off a
default as needs be and have a serious conversation about
taxing and spending, then what this panic about a debt ceiling
would allow.
Perhaps the bigger issue is that even if the current crisis were
to be averted, the US still faces numerous fiscal deadlines
that need to be addressed before the end of 2021.
We have to think about incredibly important legislative
items. But all of that is going to have to be done in the shadow
of the debt ceiling. And as far as political decision making is
concerned, I'm not sure that's a very optimal way for
congressional leaders and Congressional lawmakers to have
to think about the rulemaking in front of them. That task is hard
enough already without having to strategize about what they do in
December come the debt ceiling. I think as far as the agenda is
concerned, it's gonna make things extremely difficult, much
harder than they already are, which is hard already.
If the recurring debate over the debt ceiling has proven
anything, it's that despite numerous shutdowns and
standoffs, Congress's fiscal drama is likely to continue for
years to come.
I'm not naive enough to think that all policymakers need to do
is get in the room and hash it out and surely they can make
good policy. These are deep seated disagreements that we
have. And it's not just policymakers who have those
disagreements, they're representing us, we have these
disagreements. And so yes, I wish we were debating and
getting to compromise on these really important issues around
fiscal policy and what kind of federal government we want,
rather than spinning our wheels on this pointless debate about
the debt ceiling.