How should the US avoid debt default?

Great Debates
1

The US is running headlong into a possible default on its debt, possibly as early at June 1. For the purposes of this thread, let’s assume the Republican leadership and the administration can’t agree on a compromise solution. How should the US avoid default?

As far as I know, there are four ways, but I may be missing one:

  1. Discharge petition. A back-bencher Democrat in the House put some practically empty bill together and presented it to all of the committees where it was ignored. Apparently, it’s now able to be modified to increase the ceiling and brought to the House floor with just a majority of votes, even if the Speaker doesn’t it want it brought up.
  2. Ignore the limit, claiming it violates the 14th Amendment. The 14th Amendment states that the US credit quality shall not be questioned (or something to that effect), so the Administration could just ignore it, say “Sue me” and try to prevail in SCOTUS based on the 14th Amendment claim.
  3. Mint a large denomination coin – the Treasury Department can mint special platinum coins of any denomination. They could mint a $1 trillion coin, deposit it at the Fed and will have another $trillion to spend.
  4. Issue premium bonds. Say 30 year treasury bonds are yielding 5% interest. Issue a bond with a 10% coupon and sell it for much more than the face amount, maybe 130. So, issue $2.6 trillion of bonds with a $2 trillion face amount. Buy back $2 trillion of par bonds, and they have another $600 billion to play with.

All of these approaches have pluses and minuses. The discharge petition could work if there are enough Republicans willing to cross the aisle. Ignoring the limit is nice in that it could solve this problem permanently (if SCOTUS comes down on the side of the administration), but is legally risky and what happens if the administration violates the ceiling and loses in court? No idea.

The $1 trillion coin seems gimmicky to me and would also probably be subject to lawsuits. One thing it wouldn’t be is inflationary. Before anyone comes in with “that’s just printing money!”, when they deposit the money at the Fed, the Fed can sterilize the effects by selling $1 trillion in bonds that they already own, removing that amount of cash from circulation. The Fed wouldn’t be required to do that, but since they’re already fighting inflation, they likely would.

My preference is to issue premium bonds. I’m not even sure what the downside is – sure, the rates on those bonds will be high, but the government would have gotten more for them, so the yield is the same as the yield on the rest of the outstanding debt. I don’t think there’s a question as to how it should be counted – right now, there are treasury bonds that are well below par because they pay almost nothing in interest, but the government can’t just claim that the amount of outstanding debt is lower because of that. Maybe there are tax effects to investors that would make these bonds less efficient, and so slightly more costly for the government? Could be, but that’s still less costly than default will be.

One request – I’d like to avoid any partisan sniping (“we’re only in this mess because the Dems are profligate spenders and need this discipline!” “Oh yeah? The Pubs are holding the US economy hostage and you don’t negotiate with terrorists!”). I put this in GD, but if has to go to P&E, I get it.

Could be my longest OP ever. Thank you for listening to my TED Talk.

2

Yes it does.

See:

How to Solve the Debt Ceiling Standoff? Sue Janet Yellen.

Both a literal, and an original intent, interpretation of the Constitution say that Congress overstepped in passing the debt limit. Woiuld the Republicans on the Supreme Court then decide that, on this issue, precedent and the living constitution are more important than their supposed adherence to the first two principles mentioned?

One can only hope that at least two GOP justices are T-bill holders.

EDIT: Sorry, I see the request for non-partisan replies. But on this it is hard!

3

I prefer option 2. Congress sets spending levels, Congress sets revenue levels. By setting revenues < spending, Congress authorizes borrowing to the extent needed to keep the government going. In my opinion, the borrowing limit has already been authorized by Congress due to its inability to pass a balanced budget.

4

I think what you wrote was fine. Clearly, there are partisan opinions, and I think that may affect how SCOTUS would rule in such a case. I just want to avoid outright sniping and blaming. Thanks!

5

I really want the government to mint a $1 Trillion coin.
Think about the movie scripts that would generate! It would make Ocean’s Eleven look like nothing.

6

Simpsons did it! Simpsons did it!

7

I like this approach. As a legal theory it has the advantage of being (IMO) correct, and as a political tactic it has the advantage of putting SCOTUS in the hot seat. If they make the right decision, this settles the matter once and for all.

But if they tank the economy in service of their transparently partisan bullshit rationalizations, then there’s more political support for radical court reform (impeach and replace a couple of them, pack on another 4 seats, and for the love of God, put some teeth in SCOTUS ethics rules.

8

Any thoughts on what happens if, on June 1, the administration says “Issue above the limit!”, then on June 15th, SCOTUS says, sorry, that was illegal (or says, this is a political issue and we’re steering clear). Is that new debt still good? Does Biden get impeached? What’s next?

9

This is my choice, but on the basis of, the only way to fight the crazy is with something even crazier.

“I minted a $1 Trillion coin today, to enable the government to meet its obligations. And I’ll mint another tomorrow, and the day after that, and the day after that, and I’ll keep minting them until the Sensible Wing of the Crazy Party somehow gets it through their heads that they need to rein in the Crazy Wing of the Crazy Party.”

Six months from now, the US government will have enough cash in the bank to fund it for the next century. :smiley:

10

The fact that this even considered a hypothetical get-out-of-jail free option is appalling
How many developing countries have been crippled by the burden of debt and whose calls for International Debt Relief are met by strong resistance in the US.
Yet when the US finds itself in the same adverse balance of payments situation the Fed just prints more cash to forgive it’s own debts and export inflation

Every time the US plays debt ceiling chicken brings closer the day when through profligate attitude the US fritter away reserve currency status. As a consequence US debt will not be primarily USD denominated, and for the necessity of paying creditors the US will need to actually earn the money. This is not an unusual situation, it applies to the rest of the world. While the end result will be a marked improvement for the US in the long term the transition might well be a bracingly cold shower…

11

If SCOTUS says “political issue, we’re steering clear” then that hands the win to Biden (and, well, everyone, since it invalidates the debt ceiling).

If SCOTUS invalidates already-issued debt, that’s a blatant bright-line violation of the 14th Amendment. It would trigger a global financial meltdown that would touch even Clarence Thomas’s corrupt finances, and could ultimately trigger the necessary outrage to start replacing/packing SCOTUS justices (eventually, after a couple of election cycles).

I find it hard to believe SCOTUS would go that latter route (yes, even this SCOTUS). They’re corrupt ideologues, but corrupt ideologues do have a financial stake in a healthy economy, and they do possess self-preservation instincts.

12

I agree with HMS_Irruncible.

I’m not a lawyer. But who has standing to sue when the U.S. fails to default?

I’m thinking – someone who short-sells a T-bill.

SCOTUS members aren’t all partisan hacks. On some level, they all are probably sincere. But the conflict of interest between their likely personal investment portfolios, and the outcome of a debt ceiling ruling, is enormous.

13

Minting the coin wouldn’t actually do any of the things you said. It’s not “debt relief”, it’s not printing money in any meaningful sense. The debt limit is a fake parliamentary game, so it’s entirely appropriate to circumvent it with a fake monetary game.

14

Interesting. Maybe congress itself can sue the administration for blatantly ignoring the law? I don’t know.

I do like that route, since it solves the problem permanently. I just get worried about the legal ramifications. Issuing premium bonds seems to avoid that in a pretty clean way.

15

It’s not forgiving its own debts. It still has to borrow the money from somewhere. Borrowing a lot of money does lead to inflation, but running up a deficit which requires borrowing is a separate issue from whether the need to borrow should be decoupled from the decision to actually borrow, which is frankly nuts.

16

My problem with a gimmick is that the uncertainty as to whether it would stand will increase the cost of government borrowing. The trillion dollar coin thus has some of the same disadvantages as a partial default.

Getting a Supreme Court ruling as soon as possible, despite some risk, would I think be best. If the ruling upheld the clear language of the 14th amendment, we’d see an on-balance beneficial decrease in long-term T-bill rates. That’s because risk of debt-ceiling-related default is already baked into today’s rates.

Re original post option 1, which I haven’t seen discussed – discharge petition – that would also be good but I don’t think it has the votes. Discharge petitions need a majority of all House seats, including seats where the member is deceased or otherwise unreachable (say, hospital intensive care). That slight supermajority doesn’t exist.

17

The 14th Amendment solution: Congress does not have the power to prevent the payment of what it’s already authorized. Once a law is passed and signed, the executive branch is required to spend the money the law requires. If Congress wants to change what’s being spent, then it needs to pass a new law.

The Supreme Court is toothless here. This is a political question–the Court cannot force the other branches to pass a law. Any ruling otherwise would become a Constitutional crisis. No President is going to default on the debt, nor be forced by the Court to sign a bill into law.

18

The thing is, you’d think the Republicans in Congress would have the same motivation, but here we are. They’re willing to play chicken with the debt ceiling, and threaten to tank the economy, even when they have to know that will impact them (and their rich donors) just as much as everyone else.

Looking for sensible isn’t working.

19

Some Washington Post article says that only 5 Republicans would have to cross the aisle. Maybe it’s a few more because of missing Dems? It can’t be more than 10.

20

Congressional Republicans are ~222 people, many of whom are dumb as rocks, most of whom are cowards, and all of whom are getting all sorts of conflicting signals as to their electability in an election less than 18 months away. Mass confusion, mob mentality make it hard to make good decision.

SCOTUS are merely 9 people. True, some of them are demonstrably stupid and craven partisans. But all of them have cushy lifetime jobs, insulated from most accountability and transparency, so long as they keep the gravy train on the tracks.

I trust Clarence Thomas’s greed on this one.