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Three Ways to Avoid Going Over the Debt Ceiling

Many Tea Party Republicans have argued that failing to raise the debt limit wouldn’t be a big deal. One even suggested that a government default might stabilize markets. It now looks as though the Senate may have struck a deal that House Republicans will be forced to accept. But even if they don’t—or if they ever again try to use a vote on the debt ceiling to extort something from the White House—there are three ways President Obama could avoid a default without their cooperation.

Contrary to Republican rhetoric, lifting the debt ceiling does not give the president a blank check. All federal spending has to be approved by Congress. The debt ceiling merely limits the federal government’s ability to borrow the money it needs for spending Congress has already authorized. Payments on national debt are sort of like the payments you make to a credit-card company: you’ve already made the purchases; now it’s time to pay for them. Of course, if you don’t pay your credit-card bill, eventually they will revoke it and your credit rating will suffer. If the U.S. government’s credit rating is downgraded, it will affect the world financial system, which is based on the dollar and U.S. Government Bonds. To put this into perspective, the financial crisis of 2008 was the revaluation of one asset class (sub-prime mortgages) when many people discovered such assets were largely instruments of fraud. According to the TARP legislation, $750 billion worth of these assets needed revaluation. Outstanding U.S. bonds, which would have to be revalued in the event of a default, total around $16 trillion. This could cause a far bigger crash.

The first way for the president to get past the debt limit would be to assert the Fourteenth Amendment to the Constitution, section 4 of which states: “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.” President Obama, who is a constitutional scholar, believes that raising the debt limit without Congressional approval will just generate litigation, which he wants to avoid. But he should welcome the chance to get rid of the stupid law that requires Congress to give the Treasury Department permission to make good on the debt that Congress itself has incurred.

The second way to get past the debt ceiling would be for the Treasury Department to mint a trillion-dollar platinum coin. The Treasury issues coins all the time and sells them to the Federal Reserve, which then distributes them to banks. For some reason Congress has not limited the Treasury’s freedom to issue platinum coins (production of gold and silver coins is limited), which means that a platinum coin could be denominated however the Treasury Department sees fit. Treasury could issue a $1 trillion coin and place it in the Treasury's account at the Federal Reserve Bank. Then it could start issuing checks against it in payment of it debts.

A third way to get past the debt ceiling has been suggested by Randy Wray, professor of economics at the University of Missouri Kansas City (and, for my money, the best economist to follow on macro-economic issues. You can read his analysis here). Wray argues that the Federal Reserve Bank could start buying federal government assets, like parks and museums, and keep them running as usual. Some conservatives have recommended selling parks to the private sector (so that they can be turned into profit-making ventures), but Wray’s plan would allow them to remain public assets. The Fed could keep the parks and museums open during a shutdown, and the purchase price would go into the Treasury Department's account, helping it to pay for the spending Congress has already authorized. Yellowstone has to be worth at least a trillion dollars.

Minting a $1 trillion platinum coin or selling parks to the Fed wouldn't add to, or subtract from, federal spending levels. But both of these possible solutions to the debt-ceiling cirsis would have downstream effects. If the government replaces borrowing with the creation of a new asset or the selling off of old ones, this will eventually have an impact on how the Federal Reserve Bank carries out monetary policy and controls interest rates. And minting a trillion-dollar coin would expose how our money is actually created, lifting the veil that covers the monetary system. Many people worry that Americans cannot handle the truth about our fiat currency. Personally, I think the public debate about our economic policy should be based on reality, not on a comforting mythology. We no longer have a gold standard, or any other kind of physically limited money supply, and the sooner everyone understands this, the better.

The common knee-jerk reaction against the idea of minting a trillion-dollar coin is that it  will lead to hyperinflation. Anyone who is still worried about inflation needs to learn about the actual mechanics of our monetary system. (Wray’s Modern Monetary Theory is a good place to start.) Increasing the money supply does not cause inflation, pace Milton Friedman. If Friedman had been right, we would have runaway inflation already—and austerity policies in Europe would be working, which of course they aren't. If too many voters and politicians still associate growth in the money supply with inflation, it's only because they don't understand how a modern monetary system works. There are indeed circumstances in which increased government spending causes inflation—when, for example, the economy is at full employment—but we are nowhere near those circumstances now.

Charles Michael Andres Clark is a senior fellow at the Vincentian Center for Church and Society and professor of economics at St. John’s University in New York.

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"The first way for the president to get past the debt limit would be to assert the Fourteenth Amendment to the Constitution, section 4 of which states: “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.”"

Prof. Clark --

 

The Constitution seems to say here that  debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion are not the only kinds of debts that are "valid".  If I have interpreted this rightly so far, does this mean that any other debts already authorized shall be honored, i.e., paid?  If so, does this mean that the President could legally order the Treasury Dept. to print the money and use it to pay what we already owe?

 

As to the second method of solving this problem, does the Federal Reserve have its own money, so to speak, that is not part of the U. S. government's account?  (WHERE is U. S. money held -- at the Treasury Dept.?)

 

Could you recommend a nice easy  economics book that explains the the basics of the financial system?  Every time I look at a book, the explanations don't define the economic terms clearly enough for my poor old brain.  I mean a book without a lot of mathematical formulas. (Or maybe you could write such a book :-)  You explain very clearly.)

 

I think you're right that people should be taught where money comes from even though some will be shocked.  Yes, the system does seem like sheer magic, but it works -- or it can work if people understand human nature and our ability to trust others-- at least trust some others sometimes.  (Yes, money works because we *agree* that it will work.)

As Pro. Clark demonstrates it's hard for lay people to understand the result of default. Hard to explain to Commonweal readers and what success would anyone have in explaining default to the million foreign stock Traders. I say the default would cause a 6 trillion =10%,  drop in just US publically traderd stocks.not even counting the loss of housing prices and jobs.  

Let us thank God the GOP will fold tonight. Still stay up and watch a majority of GOP congress members still vote for a default. How many of these votes will be cast as a show to 'get even' with the first African American president?. It's even too sad for a lib like me to gloat over such an ignominius GOP defeat.

The ideas presented in this post are imaginitive.  I'm afraid my own ideas are a complete snooze: let's reduce the need for future debt by raising revenues through some combination of revising the tax code and cranking up the economy, and by reducing expenditures on some combination of military, entitlement and discretionary spending (again, a vibrant economy will help in this respect).  I would look to our legislative and executive branches to work together to make this happen.  

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About the Author

Charles Michael Andres Clark is a senior fellow at the Vincentian Center for Church and Society and professor of economics at St. John’s University in New York.