Just when most Americans thought the country had avoided an economic meltdown when we swerved away from the fiscal cliff earlier this month, comes another crisis that threatens to throw the U.S. economy into an even worse calamity. Rather than creating peace, this swerve merely set Congress and the Obama administration up for another fiscal battle, this time over the debt ceiling.
The federal government’s spending obligations will exceed its cash on hand and borrowing authority as soon as mid-February and unless Congress increases the debt ceiling, the federal government won’t be able to pay for things like Social Security, veterans’ benefits, Medicare and Medicaid, unemployment insurance, federal employee salaries and disaster relief –or send out income tax refunds. Since Congress has shown no desire to allow the administration to borrow a penny more than $16,394,000,000,000, creative minds are coming up with some imaginative ways to avoid hitting the debt ceiling. Here are some of them.
Mint a $1 trillion platinum coin
The idea behind the platinum coin is that Treasury could exploit a loophole in a 1997 law and mint a $1 trillion platinum coin, deposit it at the Federal Reserve, and magically have $1 trillion to spend. Voila! The administration could meet its spending obligations without having to ask Congress for the authority to borrow more money to do so.
Some pretty smart people have promoted this accounting trick, including Nobel Prize-winning economist Paul Krugman, not necessarily because it’s a great idea, but because it’s a better idea than the alternatives.
However, the Treasury Department squashed this idea, with Secretary Timothy Geithner saying that “Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit.”
Invoke the Fourteenth Amendment
The president could ignore the debt limit and issue new bonds through powers established in the Fourteenth Amendment. This is a tricky maneuver partly because the Constitution vests the power to spend, tax and borrow in Congress, not in the Executive branch, and partly because it’s an untested action.
As with the trillion-dollar coin, the Fourteenth Amendment won’t be the solution. Obama’s Press Secretary Jay Carney said, “This administration does not believe the 14th Amendment gives the president the power to ignore the debt ceiling — period.”
This idea is not as outrageous as it seems, as sovereign countries sell their national treasures all the time. Greece’s newly-elected Prime Minister, Antonis Samaras, said that Greece could “sell or lease some of the country’s islands” to help that country get bailout funds. In 1867, the United States bought land that now makes up much of Alaska from Russia for about $110 million in today’s dollars.
The Washington Post’s Steve Mufson brought the Greek idea to the United States when he suggested selling Alaska. Writing on Dec. 17, Mufson said that at current prices the federal government could raise at least $2.5 trillion by selling its stake in the oil and natural gas-rich state. The idea of selling Alaska apparently comes from Jim Millstein, the former Treasury official who restructured the $182.3 billion AIG bailout into a $22.7 billion profit for the government.
As profitable as “restructuring” Alaska might be, there’s been little interest in selling Alaska.
University of Southern California law professor Edward D. Kleinbard has suggested that the federal government issue I.O.U.s — known as registered warrants — to federal employees, defense contractors, Medicare service providers, Social Security recipients and others. According to Kleinbard, who is a former chief of staff at Congress’s Joint Committee on Taxation, these I.O.U.s wouldn’t violate the debt ceiling because they would merely “be a formal acknowledgment of a pre-existing monetary claim against the United States that the Treasury was not currently able to pay.”
California used this strategy in 2009 to pay its individual and business claimants, while using its cash to pay its creditors until California’s politicians reached a budget agreement. Claimants then redeemed their I.O.U.s for cash plus interest.
As of now, the idea has not been picked up in Washington.
The U.S. government could decide to just stop paying its obligations. This step would likely lead to sharp falls in the value of U.S. debt and multiple credit rating downgrades.
Holders of U.S. debt — investors in China and Japan hold more than $2 trillion of U.S. sovereign debt — wouldn’t be too pleased with this. Neither would major financial and non-financial institutions. Other than traders who are betting against the U.S. government and would benefit from a default, no one likes this option
Not only is default not a good option, it’s also not a cheap option. The last time the United States faced a debt crisis, in August 2011, the markets punished the government by raising the cost to borrow funds. The Government Accountability Office estimated that the United States paid an additional $1.3 billion in interest during fiscal year 2011 when rates rose following the delay in increasing the debt ceiling. The Bipartisan Policy Center extended the GAO’s methodology and found that the government will pay an additional $18.9 billion in interest over 10 years due to the August 2011 event.
A less extreme option — debt restructuring — is possible. Greece went through the largest sovereign-debt restructuring in history last year when it asked private bondholders to exchange their outstanding bonds for new bonds with less than half the face value. This maneuver allowed Greece to wipe $130 billion in debt from its books.
Like default, restructuring would trigger a credit event, making neither option a very good one.
Default’s not going to happen. Neither is restructuring. Geithner just sent a letter to House Speaker John Boehner (R-Ohio) charging that “Threatening to undermine our creditworthiness is no less irresponsible than threatening to undermine the rule of law, and no more legitimate than any common demand for ransom.”
When all impossible options are eliminated, then the only possible option must be pursued: raise the debt limit.
Joann Weiner teaches economics at The George Washington University. She has written for Bloomberg, Politics Daily, and Tax Analysts. Follow her on Twitter: @DCEcon.