Back in July of 2011 I wrote of an interesting idea to prevent the possibility of the US defaulting on its obligations if congress did not vote to increase the debt ceiling. The idea was to mint a Trillion $ Platinum Coin.
Congress voted to raise the debt ceiling…but what we got was an agreement for the two parties to form a committee that would jointly find spending cuts with an incentive that if no cuts could be agreed to – automatic cuts would happen to each party’s favorite programs (entitlements and defense).
This agreement was stupid then and is having negative consequences now as these cuts are potentially becoming reality as part of the ongoing “sequestration” talks (cuts were scheduled to go into effect on the first of the year, but the last minute “cliff” deal put it off for two months).
Just like in 2011, today one party has decided that they will use the Debt Ceiling to hold the nation hostage – essentially telling the nation that if spending cuts are not implemented – a vote to raise the debt ceiling will fail. The specter of the United States defaulting on its obligations is so serious that even its mention could cause panic.
I understand the need to be “fiscally responsible,” however this debate has nothing to do with fiscal responsibility – nothing. Congress has ALWAYS had the ability to spend less money – they just have chosen not to. For a congressperson to vote for a spending bill and then not vote to authorize that spending via the issuance of debt is absurd and akin to “being for it before you were against it”. I’m all up for a debate on spending, but threatening to default if spending cuts are not implemented will crush not only the U.S., but international markets as well – and at a time were recovery is fragile.
I intended on listing why I believe the Debt Ceiling, as a device and law should be removed until I read Cullen Roche’s piece “Explaining the Silliness of the Debt Ceiling and the Platinum Coin to the Rest of the World”. His view essentially mirrors mine, as follows:
The debt ceiling is a silly rule that only exists in one democratic nation outside of the USA.
Why is it silly? It’s silly because Congress already debated and voted on the spending that results in the debt issuance.
If Congress wants to reduce spending they should revisit items through the standard legislative process as opposed to holding the US economy hostage once every few months and causing endless uncertainty for the rest of us.
The US government can always harness its banking system to procure funding for future spending (well, 99% of the time and in that 1% of the time when it can’t the Fed will buy the bonds on the primary market, but that’s a different matter and totally different from QE). The system is designed so the US government can always procure funds. Auctions, for instance, are literally designed not to fail. So the USA is not designed like Greece or Spain. The US government has an inflation constraint, not a solvency constraint. (See here for more).
Willingly defaulting on US debt by using the debt ceiling as a threat is pure madness. I can’t think of many things that would be more reckless than this.
The platinum trillion dollar coin, which was first discussed on the internet by MRist Carlos Muchaand then first disseminated by Ramanan, (later by people like me) is a legal workaround the risk of defaulting in which the Treasurer can mint a trillion dollar coin, deposit it at the Fed and effectively allow the US government to cancel $1 trillion of existing debt. It’s the same as raising the debt ceiling $1T except it cancels outstanding debt as opposed to raising this silly self imposed constraint.
It’s not inflationary since it’s not $1T in new spending, but rather a cancelling of existing debt that the Fed has already taken out of the private sector to begin with.
It’s a silly idea. It’s an accounting gimmick. And I absolutely don’t think it should be used.
It’s sad that this is the current state of affairs in American politics. The fact that we’re fighting stupid ideas with stupider ideas would be funny if it wasn’t so sad.
BUT, if we have to choose between defaulting, which would be catastrophic and implementing a silly accounting trick then the decision is a no-brainer. It would be unpatriotic to default. Even more unpatriotic for leaders to allow default when they could mint the coin.
Hopefully there’s a rational way around all of this. The best suggestion I’ve heard is from Josh Barro at Bloomberg who says we should eliminate the debt ceiling in exchange for closing the coin loophole. Sounds fair enough to me.
To be clear – minting a platinum coin does NOT get around the debt ceiling, it simply removes the need to add debt, thus breaching the debt ceiling. The mechanics of it and how the law behind it came about are detailed in the following article on PragCap:
The debate about the legality or constitutionality is fierce with opponents and proponents on both sides of the issue. Barry Ritholz does a good job of summarizing some of the debate in the following blog post:
Even Paul Krugman has gotten into the debate, as follows:
Of course, the funniest take on this has to be Stephen Colbert – I tried to embed the clip, but couldn’t get it to work, so you’ll have to click on the following link – you won’t be disappointed:
The whole debate is disingenuous and destructive not only to the parties involved, but to our economy and securities markets. There is no reason anyone should have any doubt that the US will not meet its obligations.
If one party wants to limit spending, then don’t vote for bills that create deficits or excess spending – it is really that simple. Do not vote for spending and then act self-righteous by “taking on” the administration on the spending that YOU voted for.
The Debt Ceiling should be removed (and is likely unconstitutional anyway) and congress should grow up. You want to have a national debate on spending – let’s have it, but holding the nation hostage is pure gamesmanship and silliness.
As Cullen Roche said “It’s a silly idea. It’s an accounting gimmick. And I absolutely don’t think it should be used. It’s sad that this is the current state of affairs in American politics. The fact that we’re fighting stupid ideas with stupider ideas would be funny if it wasn’t so sad. BUT, if we have to choose between defaulting, which would be catastrophic and implementing a silly accounting trick then the decision is a no-brainer. It would be unpatriotic to default. Even more unpatriotic for leaders to allow default when they could mint the coin.”
I couldn’t agree more.