This is a GQ. Factual answers about the law, such as there are.
I was trying to read up on the legalities of various unorthodox responses to the debt ceiling issue.
The perennial favorite on the internet is the platinum coin gambit. Lawful? Probably not, at least according to this post by Jonathan Adler at Volokh, although there are some who disagree. But if it’s not legal, what about consequences? Would anyone actually have standing to sue if the administration were to take such action? Again, probably not. If the administration decided that they wanted to deposit a trillion dollar coin at the Fed, the courts wouldn’t do anything to stop them because no one would have standing. (Keep in mind, the administration has already ruled out the platinum option, even if it’s legal. They will not do this.)
But that raises another intriguing possibility, one which is significantly more likely to happen if we approach the debt limit with the current ceiling in place. What happens if the government makes a purchase drawn on its Fed account, and the account doesn’t have enough money? What happens if the government overdraws its account?
In an accounting sense, there is no problem whatever. Ledgers have two sides, debits and credits, and there’s nothing in the Universal Laws of Bookkeeping that mandates that the government’s account at the Fed must always have a credit balance. In a practical sense, well, what’s the Fed going to do? Bounce the government’s check? Stop payment on electronic transfers? Pshaw. By the historically, er, colorful examples set by other central banks in history, there’s an excellent chance they’ll process payment normally even if the account’s overdrawn. In a legal sense… yeah, seems like a problem. The Fed isn’t supposed to expand its monetary liabilities without making a purchase, and an overdrawn account is… not exactly a purchase. Some might argue otherwise, but it seems safe to conclude there are rules agin’ it. The question is, what happens when these rules are broken? With a constant stream of expenses, and lacking any ability to raise funds from debt issuance, a few days of being overdrawn seems practically unavoidable unless they take extraordinary precautions to always stay above zero in the account. Spending just a bit too much to meet an interest payment and avoid default could just be one of those things, an unfortunate fact of government funding flows when debt is off the table.
This means that very soon we might be looking at the government’s account with a debit balance, i.e. an overdrawn account, at least for a few days.*
Against the law? Probably. But does anybody have standing to sue? If so, who? If not, why not? I have a feeling that the answer would be the same as the platinum coin question, but I want to ask to make sure.
*Two interesting wrinkles:
If it were me, I’m not sure I’d actually give the Treasury account itself a debit balance. For propriety’s sake, I might put the Treasury account at 0 and then open a new account with an apparently innocuous title to keep track of how much they’re overdrawn.
Given the current size of the Fed’s balance sheet, they could overdraw the account for a long time by quite a lot of money, a trillion dollars or more, and still have no monetary effect on the economy, since the Fed would “sterilize” such a large injection, almost exactly like what central banks used to do in the olden days when they received an unexpectedly large influx of gold. This would work very much like the platinum coin, actually, and delay a debt ceiling confrontation by a year or more, at which time we could have the same sorts of fun financial discussions once again when the currency was in a much more precarious state. Not a high probability scenario. Only temporary overdraws seem likely given a debt ceiling impasse.