Did the House of Representatives Just (Unintentionally) Eliminate the Debt Ceiling?

By Dan Kervick

My fellow NEP blogger Joe Firestone wrote recently about House Resolution 807, the Full Faith and Credit Act, which was passed on May 9th by the US House of Representatives.  The supposed purpose of the act is to prevent default on the public debt as a result of the debt ceiling.  Many have described the act as a measure that prioritizes the financial obligations of the US government, and authorizes the Secretary of the Treasury to meet only the highest priority obligations when at the debt ceiling.   Indeed, that is how the act is described by its own authors, since the head of the resolution contains the description, “A bill to require that the Government prioritize all obligations on the debt held by the public in the event that the debt limit is reached.”

Now that the bill has been passed, the words “a bill” in that description have been replaced by “an act.”  The act seems to have been designed to provide the Secretary of the Treasury with an alternative mechanism for paying off public debt and meeting Social Security obligations once the government has reached the statutory debt limit.  But the new mechanism cannot be applied directly to other government spending commitments, and so Congress would still apparently have the ability use the debt ceiling as a tool for shutting down other government payments and forcing the executive branch to accept further spending cuts.

Such might have been the authors’ intentions.  But if I am not mistaken, this act would provide the Secretary of the Treasury with the power to meet all US spending obligations, and effectively eliminate the debt ceiling as a serious political and operational consideration going forward.

To see how the Full Faith and Credit Act might have the unintentional effect of eliminating the efficacy of the statutory debt ceiling altogether, we need to look at the text of the act.   It is quite short.   Here is the key provision:

SEC. 2. PAYMENT OF PRINCIPAL AND INTEREST ON PUBLIC

DEBT AND SOCIAL SECURITY TRUST FUNDS.

 (a) IN GENERAL.—In the event that the debt of the  United States Government, as defined in section 3101 of title 31, United States Code, reaches the statutory limit, the Secretary of the Treasury shall, in addition to any other authority provided by law, issue obligations under chapter 31 of title 31, United States Code, to pay with legal tender, and solely for the purpose of paying, the principal and interest on obligations of the United States described in subsection (b) after the date of the enactment of this Act.

The act thus authorizes the Treasurer to issue a new kind of obligation in order to pay off other obligations.  So what are these latter obligations, the “obligations described in subsection (b)”?  Here they are:

(b) OBLIGATIONS DESCRIBED. For purposes of this subsection, obligations described in this subsection are obligations which are—

(1) held by the public, or

(2) held by the Old-Age and Survivors Insurance Trust Fund and Disability Insurance Trust Fund.

Note that Section 2 of the H.R. 807 is significantly different from the original version of the bill that was put forward back in 2011.  That original version was a bit more complicated.  It directed the Treasurer to prioritize government payments once at the debt ceiling and to “pay with legal tender” the interest and principle on public debt obligations to the extent that the Treasury’s funds were sufficient for doing so, and then to extend the maturities of debts that could not be so paid.  If all public debt obligations could be paid from available funds, the Treasurer would then be required to prioritize all other spending obligations and pay them off “in that order the Secretary considers advisable and in the public interest.”

But the version of the act that was actually passed on May 9th authorizes the Treasurer to issue “obligations … to pay with legal tender”, the principal and interest on the obligations described in subsection 2(b).   Now, an obligation is just another debt instrument.   So the act basically permits the Treasurer to issue IOUs to pay the principal and interest on public debt.  It permits the Treasurer to redeem conventional government debt obligations – all of the usual bills, notes and bonds the government issues, and that count against the debt subject to the debt limit – with a new kind of debt obligation.

Call these new types of obligations “807-obligations”.  The Full Faith and Credit Act then says the Secretary of the Treasury can issue an 807-obligation whenever it has reached the debt ceiling, and use it to pay off public debt.  If you have a T-bill with a $10,000 face value that matures on June 1st, and the government is at the debt limit, then on June 1st the Treasurer is authorized to give you an IOU for $10,000.

Now here are a couple of important facts about 807-obligations:

1. 807-obligations do not count against the debt ceiling, once the debt ceiling has been reached.

This is made plain by section 2(d) of the act itself:

(d) OBLIGATIONS EXEMPT FROM PUBLIC DEBT LIMIT.—Obligations issued under subsection (a) shall not be taken into account in applying the limitation in section 3101(b) of title 31, United States Code, to the extent that such obligation would otherwise cause the limitation in section 3101(b) of title 31, United States Code, to be exceeded.

2. 807-obligations, once issued, would themselves be obligations held by the public.

This is obvious from the plain language of the act, as well as from the fact that section 2(a) of the act specifies that these new obligations are to be issued under chapter 31 of title 31 of the US Code, which is all about public debt.

It thus follows, according to subsection 2(b) of the Full Faith and Credit Act, that 807-obligations can always be issued to pay off other 807-obligations once the debt ceiling has been reached.  In effect, then, the bill gives the Secretary of the Treasury unlimited authority to pay off conventional debt with a new kind of debt which does not count against the debt limit, and to roll that total debt over perpetually.  Usually, when people speak of “rolling over the public debt”, they mean that the government can sell new debt and use the funds raised to pay off old debt.  But the Full Faith and Credit Act provides a way for the Treasurer to roll the debt over at the debt limit by issuing a kind of money-substitute, and by using this substitute to pay the creditor.

But, one might counter, this new mechanism only applies to public debt obligations and Social Security, and still doesn’t give the Treasurer the ability to issue IOUs to pay other kinds of bills.  So Congress can still force a default or suspension of payments on all of those other government spending commitments and plans.

While this claim is technically true, it seems to me that if this act takes effect there will no longer be any obstacle to the Treasurer meeting all government spending commitments, even if it has reached the formal debt limit.  Suppose the Treasury needs $10 million dollars to pay some building contractors, but the debt held by the public is at the statutory debt limit and so Treasury can’t sell any more bills, notes or bonds.  Building contractors are not one of the types of obligation covered under subsection 2(b) so the Secretary can’t pay the contractors with 807-obligations.  However, the Treasurer can issue a bunch of 807-obligations to pay off some conventional short-term debt obligations, which then gives the Secretary more space to issue conventional debt.  Since these new 807-obligations don’t themselves count against the debt limit, then once they have been issued and used to redeem T-bills, that brings the public debt down $10 million below the debt ceiling.  Treasury can then sell $10 million worth of new securities to raise the cash, and pay the contractor with the cash.

The law thus allows the Treasurer to continually extend US borrowing beyond the debt limit by swapping in, whenever necessary, debt that is not subject to the limit for debt that is subject to the limit.

But what if the public doesn’t really want to hold these 807-obligations?  After all, if the government is no longer guaranteeing that it will always make the principle and interest payments on its securities with dollars, and if the buyers of public debt know they might end up getting IOUs instead of money when the obligations come due, won’t those buyers decide Treasury securities are now more risky than they were before?  Won’t they as a result bid up the yields on these securities and raise the government’s borrowing costs?

I don’t think this is really a serious concern.  For one thing, the Fed can always guarantee a market for whatever kind of debt obligation the government wants to sell, at whatever price, by standing ready to repurchase the debt at a price that is profitable to the purchaser.  But even if we imagine that some future debt-hawking Fed chair adopts an uncooperative stance toward the extension of public debt, here are a few other salient factors to consider:

First, the Full Faith and Credit Act contains no directions pertaining to the maturities of the new kind of obligations it permits the Treasury to issue.  Presumably that decision is left by omission to the discretion of the Secretary of the Treasury, especially given that Chapter 31, Title 31 of the US Code, which is specifically referenced, gives the Secretary broad discretion to decide on the maturities of other government obligations.

The US code also gives the Treasurer the option of prescribing conditions for redeeming T-bills before maturity.  So, if the Treasury maintains an abundant stock of short-term debt, redeemable before maturity, it should always have the ability and flexibility to work around any formal debt ceiling constraints by using 807-obligations, all while satisfying market demands for dollar redemption of securities.  Suppose the Treasurer wants to issue a bunch of 90-day T-bills with a total value of $500 million, and do so in such a way that the purchasers are guaranteed to be paid the face value in cash at exactly 90 days.  It could sell 89-day T-bills, redeem them with 1-day 807-obligations on day 89, bringing the debt down $500 million below the debt limit.  It could then sell $500 million more in conventional securities, and on day 90 redeem all of the 807-obligations it issued on the previous day.  If the creditors want dollars, Treasury can get them the dollars.

Of course, such complex operations will probably never be required to get the public to be fully confident in the new 807-obligations, and treat them as something close to money.   Like other obligations of the Treasury, 807-obligations would be negotiable.  One assumes that once issued they would be highly liquid.  Perhaps the Treasury could even issue the paper versions of these obligations in roughly the shape and size of a Federal Reserve Note, and encourage their use as money in ordinary transactions.  In principle they are no different than other forms of money.  After all, a Federal Reserve Note is also an obligation of the US government, but can’t really be redeemed for anything besides other obligations of the US government.   If you have an 807-obligation that might only be redeemable for other 807-obligations, how is that different from what the Fed does?

Finally, even if statutes require that people pay their taxes in dollars, and can’t use 807-obligations, the Treasury could set up special tax processing accounts that allow people to deposit their 807-obligations.  Each day, by redeeming ordinary debt subject to limit with new 807-obligations, the Treasurer could create space to issue more conventional debt to raise dollars sufficient to redeem all of the 807-obligations in the tax processing accounts.  The holders of those accounts, or their agents, could then use to pay the tax obligations.    As far as the public is concerned, anything you can use to pay your taxes is as good as money, and should be willingly accepted as such.

___________________

ADDENDUM RAISED FROM COMMENTS:

In the original piece above,  I parsed this phrase from HR 807:

“the Secretary of the Treasury shall … issue obligations … to pay with legal tender, and solely for the purpose of paying, the principal and interest on obligations of the United States described in subsection (b) etc.”

to mean:

“the Secretary of the Treasury shall issue obligations to pay with legal tender, and use those obligations solely for the purpose of paying the principal and interest on obligations of the United States described in subsection (b) etc.”

That is I took the bill to be authorizing some new kind of California-style IOUs. But others have suggested to me it more likely means:

“the Secretary of the Treasury shall issue and sell obligations to obtain legal tender, and then use that legal tender solely for the purpose of paying the principal and interest on obligations of the United States described in subsection (b) etc.”

Yet I think the general point of the piece still stands, since whether the new 807-obligations are sold for dollars which are then used to pay of debt, or are a new kind of IOU used to pay off debt themselves, the Treasurer can still undertake the manipulations I described in the piece. The Treasurer can sell the 807-obligations to retire old conventional debt, and then sell new conventional debt to carry out other kinds of spending. This wouldn’t violate the law, because the dollars raised from the sales of 807-obligations wouldn’t be used to carry out the kinds of spending not specified in section 2(b).  Those dollars would come from regular debt issuance after debt retired via sales of 807-obligations opens up room under the debt ceiling for more ordinary debt.

So, then, suppose Congress says there are two kinds of debt:

1. Regular debt, the funds raised from which can be used to carry out any authorized spending, and

2. Special debt, the funds from which can be used to retire regular debt.

And suppose it imposes a nominal limit on regular debt, but says special debt can be issued whenever regular debt is at the nominal limit. Then there is no practical debt limit so long as there is always regular debt available to be retired.   The Treasurer can always issue regular debt up to the nominal limit, then swap in special debt for the nominal debt, which creates more room for regular debt.

40 Responses to Did the House of Representatives Just (Unintentionally) Eliminate the Debt Ceiling?

  1. Sunflowerbio

    I think what this bill shows is the ignorance of Congress about the way fiat money is created by a sovereign government. If they really understood how fiat money is created, they could greatly simplify the process by allowing the Treasury to issue currency directly, without debt. Fortunately, it is an ill wind that blows nobody good.

  2. Detroit Dan

    Interesting. But this law still needs to be passed by the Senate and signed by the President, correct?

  3. Great post Dan. Those of us hoping for the best economic possibilities of our grandchildren are thankful for the discerning that you and Joe possess.

    Let’s hope they don’t realize their mistake and amendment this.

  4. Wonder if it’s intentional?

  5. reserveporto

    Anyone else amused at how amazed, surprised, and ecstatic the mainstream financial media is at the results of so-called Abenomics?

  6. Detroit Dan

    Does Abenomics contain fiscal stimulus, or is it all monetary? Is it all smoke and mirrors, or has the Japanese Central Bank been buying U.S. Treasuries (and other countries’ bonds) to devalue their currency?

    • reserveporto

      http://en.wikipedia.org/wiki/Abenomics
      http://blogs.reuters.com/anatole-kaletsky/2013/05/17/the-radical-force-of-abenomics/
      http://www.economist.com/news/briefing/21578052-shinzo-abe-shaking-up-japans-economy-seems-different-man-one-whose-previous

      Yup, plenty of fiscal stimulus. It’s supposed to be followed up with “structural reforms” for “international competition” and “employment deregulation” and “agricultural consolidation”. These are generally all code words for increasing concentrations of wealth. Can’t say if Japanese voters will really let those things get too far along, though the financial reporters seem to be salivating at the idea. In any case, even if no “structural reform” actually happens, Japan will still find itself at the end of this fiscal expansion with repaired and improved public infrastructure and with an even higher “debt”-to-GDP ratio. A ratio whose impact on the standard of living of actual people and whose impact on the issuer of that currency only applies in the sense that it forces them to use more of that currency in order to purchase foreign production (favouring domestic production).

    • reserveporto

      If a country ever finds itself needing to go through 2 decades of “stagnation”, Japan isn’t a bad model to follow. Apparently, 3.4% productivity growth per worker per year over that period, sub-5% unemployment most of the time, and modernized public infrastructure are bad things according to many financial analysts.

      • Yeah, Japan seems to really through a fright into American neoliberals. Low unemployment, stability, high economic equality, retirement security. Americans have been begging the Japanese to “fix things” for a couple of decades now.

        • sunflowerbio

          Just you wait. All hell will break loose there when the debt to GDP ratio reaches, what, 250%.

          • reserveporto

            What’s special about 250%? Why not 200%? All the debt-to-GDP ratio represents is the desire of the private and foreign sectors to hold financial assets. Japanese demographics are geared towards a population that isn’t busy doing all the spending that comes with raising children and starting a home so they have very little that they really want to buy other than financial assets and health care – and Japanese health care is amongst the cheapest and most effective around.

            • sunflowerbio

              Just a spoof on R and R’s 90% figure as the tipping point for a shrinking economy. I’m not sure what the current figure for Japan’s debt to GDP ratio is, but I think it must be pretty close to 200% right now; so we have to give them enough rope to hang themselves don’t we?

              • reserveporto

                http://www.economist.com/news/finance-and-economics/21577080-shinzo-abes-government-looks-likely-disappoint-fiscal-consolidation-dont

                Apparently it’s at 230% of GDP. The article I linked here spends many paragraphs worrying about it, then, in the second last paragraph, in brackets, the financial reporter shows that he might have been exposed to understanding what this debt really is. “(Not everyone worries about this: a counter-argument is that Japan’s government has to run a big deficit only because Japan’s combined private sector insists on running a big surplus.)” If Japan’s private sector did not crave liquidity, they’d be spending on taxable activities and that deficit would disappear. Spending on interest on the debt amounts to being just another money distribution (social welfare) program and does not indicate some strange moral superiority of its recipients.

  7. Dan,

    Interesting but I think you are misreading both the wording and its spirit. (“Spirit” for the lack of a better word. the whole thing is spiritless, if you get what I mean).

    if what you say is true the statement you quote would stop at:

    “Obligations issued under subsection (a) shall not be taken into account in applying the limitation in section 3101(b) of title 31, United States Code”

    but it goes on.

    Suppose $10bn of principal and $250m of coupons is expiring. The Treasury issues new bonds, gets the funds and pays the old bonds.

    At the time $10bn + $250m is not subject to law.

    But once it has paid off the old bonds, only $250m is not subject to the debt ceiling law.

    The debt is at the ceiling. The Treasury is out of funds. It has to wait for taxes to make expenditure payments.

    • But once it has paid off the old bonds, only $250m is not subject to the debt ceiling law.

      The debt is at the ceiling. The Treasury is out of funds. It has to wait for taxes to make expenditure payments.

      I don’t think so Ram. It might be true that, after paying, only $250 is not subject to the limit. But the debt is no longer at the ceiling, since by paying off the old bonds the debt has been reduced by $10 billion.

      It’s easier for me to wrap my head around it if I think in terms of bills. Suppose the debt outstanding is exactly at the ceiling: $16.394 trillion, and suppose there are $10 billion in T-bills maturing on Monday. Because the debt is at the ceiling, Treasury is authorized to sell $10 billion in 807-obligations to pay that $10 billion debt. It does so, after which the federal debt at the end of the day on Monday is still at $16.394 trillion, but that amount now consists in:

      Ordinary debt subject to limit: $16.384 trillion
      807-obligations: $10 billion

      Because the government’s debt subject to limit is now $10 million below the debt ceiling, it can sell $10 billion more in T-bills on Tuesday, which it does. So at the end of the day on Tuesday, the total debt is now $16.404 trillion, consisting of:

      Ordinary debt subject to limit: $16.394 trillion
      807-obligations: $10 billion

      Rinse and Repeat.

      So by keeping the debt subject to limit oscillating between an amount always at the limit and an amount just below the limit, and making sure there are always convenient amounts of maturing securities to redeem or coupon payments to make, the Treasury can continue to raise the total actual debt up above the nominal debt limit.

      • Shorter clarification: the law says it can issue these new obligations to pay interest and principle.

      • Dan,

        “But the debt is no longer at the ceiling, since by paying off the old bonds the debt has been reduced by $10 billion”

        But it is at the ceiling. Old debt plus new debt with some provisions to allow it to go beyond the ceiling.

        In the quote, “(d) OBLIGATIONS EXEMPT FROM PUBLIC DEBT LIMIT.” notice the phrase “to the extent”.

        I think I know your arguments, bills or bonds. Pay non-807 bonds with 807s and the total amount of non-807s reduces giving the Treasury room to issue more non-807s.

        But once 807s are issued, the debt subject to limit includes the 807s as well with some exemption.

        The law has a qualification of its own “… to the extent…” .

        • I see what you are saying. Where the law says:

          Obligations issued under subsection (a) shall not be taken into account in applying the limitation in section 3101(b) of title 31, United States Code, to the extent that such obligation would otherwise cause the limitation in section 3101(b) of title 31, United States Code, to be exceeded.

          you take that to entail implicitly that:

          Obligations issued under subsection (a) shall be taken into account in applying the limitation in section 3101(b) of title 31, United States Code, to the extent that such obligation does not cause the limitation in section 3101(b) of title 31, United States Code, to be exceeded.

          Is that implication forced on the interpreter of the law?

          • Paul Boisvert

            Unfortunately, Dan, the logical implication you fear seems to be the natural one, and is clearly what the bill’s writers intended. I’m sure courts would enforce it. The 10 m in 807 bonds added to the now only 16.384 m in normal obligations would NOT exceed the limit, hence there is no reason to exempt them from the debt ceiling “limitation”. The instruction as to when they CAN be exempted clearly carries the implication that otherwise they should not be exempted.

            But it was a very nice try! Normally, I tend to think that exploiting “logical traps” in legislation will almost never work, since courts tend to take into account the intent of the parties rather than the strict language, particularly when the intent is very clear. But perhaps some variation on your attempt might be worth pursuing–maybe along the lines of “when” the normal debt has to be paid off by the 807’s, which the act does not seem to specify. If 10 billion in normal debt needs to be paid, issue enough 807 bonds to pay off 100 billion, but hold off doing so on 90 billion, then keep that 90 billion in cash sitting there in plain sight and ask the public, “why can’t we use this money now to pay regular govt. expenses, since we can always issue more 807’s later to cover the “principal and interest” on the current outstanding 807’s. ” Maybe the absurdity of the system would become apparent… :)

          • Dan,

            I see your stress (italics). but it that the rule and the exception is valid at all point. So once the debt ceiling is hit, 807s are issued and the full amount is exempt. So it allows for new debt to be issued above the ceiling but once non-807s are paid off, it has to applied again.

            The interpretation has to be like that because *else* the law would simply have stated that the debt ceiling law is not applicable for obligations under (a)

            • Yes, I’ve been thinking about this all night, and I think you and the other folks who have made this point are clearly right. I would have formulated the act differently if writing it, but the legislative intent is clear from the House debate. I’m going to write another post explaining why my initial interpretation fails.

  8. It would be a lot simpler if Congress and the President would just uphold the Constitution and their Oaths of Office and acknowledge that any and all obligations of the U.S. Government must be paid.

    It wouldn’t hurt to throw in there that our government is far from “broke” and actually has unlimited financial resources at its disposal. The lives of most average citizens could be vastly improved by the simple act of recognizing that the affordability question is always a false limitation. The debt ceiling is just a false cover for Congress to behave immorally.

    The debt ceiling law is unconstitutional and should be thrown out.

  9. Was it not Winston Churchill who intoned something to the effect – Americans will always do the right thing, only after they’ve tried everything else? Just how long will 538 braying fools and one head of state, with administrative staffs and computers, take to discover an economic policy that can actually be called an economic policy?

  10. Ramanan makes an interesting point. The intent of the law appears to be hiking the debt ceiling only as is necessary to cover debt service (w/ the principal language included to allow for rolling over T-bonds as they reach maturity).

    Where the House is mistaken is the 14th Amendment’s “validity of the public debt” that’s not to be questioned is broader than just Treasury bonds. Everyone who expects money by Uncle Sam (whether for unpaid wages or unpaid contractor invoices or Social Security benefits) has a legal right to payment.

    To really go into the weeds, every payee has a procedural due process right to payment since Congress has already appropriated the necessary funds (a debt ceiling freeze would simply be an attempt by Congress to go back on its word, which it can’t do). Payments backed by contractual obligations (e.g. unpaid wages) are in a stronger legal position than “gratuitous” entitlement spending (e.g. Medicaid) but only in the sense Aegis cruisers are more formidable than Aegis destroyers. The distinction is irrelevant because any effort to cut off either group would be a violation of 5th Amendment due process rights and would quickly be enjoined by one federal judge or another. After all, equity delights to do justice and not by halves (can you tell I’ve been writing a legal brief all evening?). :o)
    http://en.wikipedia.org/wiki/Maxims_of_equity#Equity_delights_to_do_justice_and_not_by_halves

  11. Pingback: Dan Kervick: Did the House of Representatives Just (Unintentionally) Eliminate the Debt Ceiling? « naked capitalism

  12. If Treasury is at the debt ceiling, 807s can be issued to pay for maturing principal on conventional debt. Such principal rollover counts as debt under the debt ceiling, so that the combination of maturing conventional principal reduction and 807 principal increase means that the debt ceiling remains fully utilized.

    (Such a facility becomes useful when Treasury is not planning a conventional refunding operation whose settlement timing is synchronous with the required settlement for maturing debt. That means it won’t have the cash to repay maturing principal. Conversely, if it did undertake such a synchronous conventional refunding operation, it would have the cash, and the sequence of maturing principal and newly issued principal would still net out to an unchanged debt ceiling utilization. So gross conventional debt issuance would be allowable in that case.)

    And I think this overall interpretation is fairly clear from the existing wording of the act, without further elaboration:

    (d) OBLIGATIONS EXEMPT FROM PUBLIC DEBT LIMIT.—Obligations issued under subsection (a) shall not be taken into account in applying the limitation in section 3101(b) of title 31, United States Code, to the extent that such obligation would otherwise cause the limitation in section 3101(b) of title 31, United States Code, to be exceeded.

    In addition, 807s can be issued to pay for any interest payment.

    That means that 807s can be used to finance ALL funding requirements where the budget is in primary balance, meaning that the deficit consists of interest payments and interest payments are financed by 807s and principal repayments are rolled over with 807s as necessary.

    BUT 807s cannot be used to finance a primary deficit, which results from non-interest expenditures. Considering the above, there’s no way that Treasury can issue either new conventional debt or 807 obligations for the purpose of funding a primary deficit. It can’t issue new conventional debt, because the additional non-interest deficit finance would drive it over the debt ceiling. And it can’t issue 807 obligations because it’s simply not allowed to do so other than for principal or interest payments on debt.

    Put it all together, and you have the (Republican) objective satisfied, which is to allow 807 financing of the debt and the interest on the debt, but not to allow it for non-interest deficit financing.

    Your update interpretation is not correct, IMO. As discussed elsewhere, issuing an obligation to pay in legal tender is not the same thing as issuing legal tender.

    • As discussed elsewhere, issuing an obligation to pay in legal tender is not the same thing as issuing legal tender.

      I agree with that. But the more I read the law, the more I think that my reading of 2(b) as authorizing the Treasurer to issue “obligations to pay in legal tender” is due to clunky construction, and that what the law is intended to do is just authorize the Treasurer to issue and sell additional debt obligations to raise legal tender, and then use the legal tender to pay off the maturing debt and Social Security obligations.

      • Regarding:

        ” (a) IN GENERAL.—In the event that the debt of the United States Government, as defined in section 3101 of title 31, United States Code, reaches the statutory limit, the Secretary of the Treasury shall, in addition to any other authority provided by law, issue obligations under chapter 31 of title 31, United States Code, to pay with legal tender, and solely for the purpose of paying, the principal and interest on obligations of the United States described in subsection (b) after the date of the enactment of this Act.”

        I respect your interpretation, but I do find it hard to accept.

        Legal tender usually means coins or notes, does it not?

        What would be the purpose behind issuing 807s for coins and notes just to repay conventional debt maturities in coins and notes?

        Apart from the obvious challenge of operational feasibility, what would be gained even if it were operationally possible?

        And apart from all that, the issuance of 807s to replace maturing debt is EQUIVALENT TO (but not exactly the same as) crediting TGA for 807s issued and debiting TGA for conventional debt paid off – its just that the TGA debit and credit are for the same amount, thereby netting to zero, and the corresponding counterparty accounting entries are for the same counterparty – the maturing debt holder, who is being paid with 807s. Yet there is no actual net exchange of any of TGA balances, reserves, or bank deposit money. There is instead an EQUIVALENT or VIRTUAL flow of various bank deposit media of exchange in that sense – which I think is more analogous to the point you are wanting to make about a flow of legal tender.

        • Interesting, JKH. I was assuming that under the law balances held in Treasury accounts, specifically the TGA, counted as legal tender. But all I can find in the US Code is this:

          31 USC § 5103 – Legal tender

          United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or silver coins are not legal tender for debts.

          I’m going to read chapter 31, title 31 more carefully to see if I’m missing something about all of the different kinds of obligations that are comprehended under that part of the US Code.

  13. golfer1john

    ” issue obligations under chapter 31 of title 31″

    1. Is that not the section that authorizes all the normal T-bills and T-Bonds? If so, how would the “807” obligations be distinguished from all the rest, once issued? Seems to me they would be ordinary T-bills, only the authority to issue them, and the amount and purpose of them, is contingent on reaching the debt ceiling.

    2. What if, at the instant the debt ceiling is hit, the Treasury issued enough 807’s to replace all the bonds held by the SS “trust fund”, and swapped them at face value for the debt held by the trust fund. And what if these 807’s paid a high interest rate, say 1000 basis points (10%) higher than the debt currently held in the trust fund, and had a very long maturity (probably limited by chapter 31 of title 31, but if not, perpetual)? Would that not “save” Social Security?

    • What a good idea! -:)

    • Well, if my revised reading of the law is correct, then even using the “obligations to pay legal tender” IOU interpretation of 807s, all of those interest commitments would become part of the debt subject to limit as other debt is paid off.

      But also HR 807 authorizes the Treasury to issue the 807s “solely for the purpose of paying principal and interest” on existing obligations. It doesn’t authorize the Treasury to award higher government interest payment commitments to the holders of those obligations. So in other words, if you have a government bond that pays the principal 1% interest, HR 807 doesn’t authorize the Treasury to pay it off by giving you a bond that pays the principal plus 10%, 20% or 200% interest. I think that is true even if the bondholder is the Social Security Trust Fund.

      On Social Security as in so many other areas, liberals are hamstrung politically by the fact that they have become the conservative party and have not articulated a compelling and motivating vision of the retirement system of the future. At every step of the way over the past few years, Republicans have put forward bold (reactionary) plans for social transformation, while liberals have done nothing other than attempt to “hang on” to existing structures and defend the status quo. Wouldn’t it be better if liberals were fighting for an expansion of Social Security and decreased reliance on privatized retirement plans? Put the conservatives on the defensive. If The White House had labelled the whole motley mess of 401Ks and others stuff “The Wall Street System” back in 2009 right after people had seen vast quantities of their retirement savings evaporate, and everyone despised everything to do with Wall Street, and then offered everyone a plan to move over to a purely government plan, to get rid of the payroll tax and replace it with a broad-based progressive tax, I think he could have sold it easily.

      • golfer1john

        Well, we’re currently paying off maturing debt issued several years ago, refinancing it with new debt at much lower interest rates. If the Fed decides to raise rates some day, we’ll be refinancing the debt issued today at low rates with new debt issued at higher rates. I don’t see how there could be any legal restriction on the coupon rate that wasn’t unenforceably vague.

        It’s not the normal process, i.e., the auction to primary dealers, but the new law does not seem to limit the coupon rate on this special debt, not does it limit repayment of principal to only maturing debt, which would seem to be an oversight that could be taken advantage of. Is there any law that says Treasury must set the coupon rate to something close to what they anticipate the market rate will be? Could they not today sell 10-year notes with a 4% coupon, and auction them at 200% of par? (I know that math isn’t exactly right, but you get the idea.)

  14. Bobby Gladd

    “The supposed purpose of the act is to prevent default on the public debt as a result of the debt ceiling.”
    __

    So, we need legislation to redundantly express what’s already IN the Constitution?

    • golfer1john

      I think it’s a belt and suspenders thing. Last time around, there were threats that the interest and maturing principal would not be paid.

  15. Pingback: No, It Looks Like the House Has Not Unintentionally Eliminated the Debt Ceiling After All | New Economic Perspectives

  16. I just posted my second thoughts in a new post. Possibly this isn’t the end of the discussion.