Mr. President, End Debt Ceiling Hostage-taking for Good!

On May 9, 2013, The Republican House passed H.R. 807 the Full Faith and Credit Act. The Bill says in part:

(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.
(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.

So, in brief, the Bill provides for the Treasury, even when it is about to reach the debt ceiling, to issue additional debt to pay principal and interest on debt instruments issued to the public including foreign nations, and to pay principal and interest on Social Security (SS) “trust fund bonds” in the course of paying SS recipients.

Reactions to the Act immediately fell into two categories. Some hailed it as a move toward fiscal responsibility, while others saw it as another demonstration of Republican fiscal irresponsibility paving the way for US default on some obligations not prioritized by the bill, while making sure that bond market interests and “China” would get paid what they were owed, while the American people would be stiffed, unless Democrats gave the Republicans what they wanted in the upcoming debt ceiling crisis now projected for this October. Here are some typical reactions of the two types.

From John Avlon at the Daily Beast we have:

But even Speaker John Boehner realizes that the 50 or so radicals on the far right of his own party—the Bachmann, Broun, Gohmert and King crew—are the greatest impediment to responsible self-government right now.

That’s why the new responsible Republican proposal, which passed the House Thursday by a vote of 221-207, could be the best way to defuse the debt ceiling from its most destructive impact. . . .

So the Full Faith and Credit Act should be a no-brainer. But the Obama administration is opposing the measure, releasing a Statement of Administration from the Office of Management and Budget that stated H.R. 807 would “result in Congress refusing to pay obligations it has already agreed to … this bill would threaten the full faith and credit of the United States … this legislation is unwise, unworkable, and unacceptably risky.”

And here’s one from Travis Waldron at Think Progress:

But such a plan makes it clear that the U.S. will meet only some of its obligations, leaving many Americans, including troops, veterans, and the elderly, out in the cold. . . .

Worse yet, the Republican plan doesn’t allow the nation to avoid default. If the U.S. services its debt payments but still misses others, it is still defaulting on payments it is required to make. Since the bill only allows Treasury to make payments as it receives revenues, and the bulk of its payments are made at the beginning of the month even though revenues don’t come in until later, it would almost certainly be unable to meet at least some of its obligations.

When the GOP has considered similar plans before, Treasury officials have called it “unworkable.” Bipartisan analysts said it was “essentially impossible.” Failing to fulfill spending obligations would be “the first step to becoming a banana republic,” a Bush-era Treasury official said. Instead of inspiring confidence among investors, bondholders, and the American people, the legislation would zap it.

Far from preventing default, the Full Faith and Credit Act would essentially ensure it. That wouldn’t just put paying China ahead of senior citizens and members of the military — it would also hammer economic growth both in the United States and across the world. (HTHuffington Post)

Calling this a “responsible” bill as the Daily Beast did is outrageous, and, of course, Waldron is quite right to point out that the bill is fundamentally irresponsible because if it were to pass and nothing more was done it would still not avoid a default inflicted by Republicans who refuse to raise the debt ceiling for the sake of hostage-taking. Nevertheless, even though I agree with Waldron and the President that the bill is irresponsible, I also think that the Democratic Senate should jump on the opportunity provided by the Republicans and pass it forthwith without Amendment, and that the President should sign it immediately, as part of a larger plan to take the debt ceiling off the table in all future negotiations. Here’s the plan.

Budget projections show that if the Bill is passed, then the Treasury would have the authority it needs to meet the majority of its projected deficit obligations and would lack only about $170 Billion in Fiscal 2014 to meet them all. Let’s look at CBO’s budget projection.

Total Revenues for the Treasury in 2014 are projected at $3.0 Trillion. Total Outlays are expected to be $3.6 Trillion. That’s a deficit of roughly $.6 Trillion, or $600 Billion. CBO projects net interest on debt owned by the public of $243 Billion, and I’ve estimated OASDI interest at about $225 Billion. Summing the two we see that the Full Faith and Credit Act would allow debt financing of $468 Billion, leaving a gap of about $130 Billion which Treasury can’t cover with debt instruments.

So, what can Treasury and the President do to meet its remaining obligations? The answer is that it can use Platinum Coin Seigniorage (PCS), an approach the Administration rejected in January of 2013 before the latest compromise with the Republicans allowing debt financing while temporarily suspending the debt ceiling. In January, the dominant proposal making the rounds in the blogosphere was that the Administration use a few Trillion Dollar Coins to defuse the crisis. I didn’t favor that, but preferred and still prefer a “shock and awe” $60 Trillion PCS strategy that would end austerity politics forever, if the President had the desire and the will to do that.

The President doesn’t have the desire and the will, or he would already have filled the public purse in this way. Assuming he still feels that he doesn’t want to end austerity politics, with its terrible effects on poor people and the middle class; but does want to avoid debt ceiling crises in the future, provided the Full Faith and Credit Act is passed without amendment, he can then:

— First, beginning at the start of fiscal 2014, mint platinum coins having face values of $20 Billion per month until the Federal Government is no longer in danger of failing to meet all its obligations. This is about twice the average amount of projected shortfall of $10.8 Billion per month corresponding to the $130 Billion annual shortfall projected. That amount should be enough to cover variations from the average, and also errors in the projection caused by possible recessionary effects due to the sequester and the FICA tax increase in January.

— Second the Government can keep doing this until Congress fully restores the capability of the Treasury to issue debt instruments alongside deficit spending Congress has appropriated. How long this will go on, depends on the Republicans, of course. But even over a year’s time, the amount minted would come nowhere near the Trillion Dollar Coin values the Administration found unpalatable a few months ago. In fact, if the debt ceiling crisis is resolved by year’s end, the amount minted wouldn’t exceed $60 Billion, hardly great enough to roil the international or bond markets, or most people, given the amount of Quantitative Easing (QE) the Fed has already done. If the debt ceiling crisis lasts any longer than that and the financial world gets roiled by the practice, then a) it will certainly prefer the minting of those coins to the alternative of default; and b) they’ll know which party to come down hard on in blaming someone for the continuing crisis.

— Third, at some point in this process, the Republicans will be willing to increase the debt ceiling, but since PCS is being used to avoid shutting down the government or defaulting, their leverage to extract concessions will make the debt ceiling negotiations much easier than they are today. I recommend that the Administration give away nothing to get the debt ceiling raised. It should simply insist on a no-strings attached permanent elimination of the ceiling; while pointing out that the Full Faith and Credit Act, coupled with PCS provides enough flexibility for the Treasury to continue spending appropriations and meet all the nation’s obligations, even if the debt ceiling is never raised.

This may seem to be a very hard line. But in passing the Full Faith and Credit Act, the House has given the Democrats the opportunity to use debt instruments to cover most of the deficit anyway. And PCS gives the Administration the power to cover the rest. So, the Republicans would have a choice of getting rid of the debt ceiling permanently, or allowing the minting of $20 Billion platinum coins at the beginning of every month. If that’s their choice, then I think they’ll get rid of the debt limit, before the President decides to mint a $60 Trillion Dollar coin, don’t you?

Update: CBO just released revisions to its projections for 2013 – 2023. Total Revenues for the Treasury in 2014 are now projected at $3.042 Trillion. Total Outlays are expected to be $3.602 Trillion. That’s a deficit of roughly $.56 Trillion, or $560 Billion. CBO projects net interest on debt owned by the public of $237 Billion, and I’ve estimated OASDI interest at about $225 Billion. Summing the two we see that the Full Faith and Credit Act would allow debt financing of $462 Billion, leaving a gap of about $98 Billion which Treasury can’t cover with debt instruments.

The smaller gap means that it may not be necessary to use $20 Billion platinum coins every month; but only $15 Billion coins to handle variations from the new average shortfall of about $8.2 Billion per month. Of course, if deficits accumulate faster than expected, it would be easy to simply begin minting $20 Billion coins.

11 responses to “Mr. President, End Debt Ceiling Hostage-taking for Good!

  1. The deb ceiling is unconstitutional, under the 14th amendment!

  2. Joe Firestone

    Actually, it’s not right now. See here.

    In any case, the only one who would have standing to challenge it is the President, and he, evidently, doesn’t want to do that.

  3. sunflowerbio

    Suppose that Congress does vote to eliminate the debt ceiling. What would happen in outlying years as deficits grow due to increasing transfer payments to retirees for healthcare and other items not covered by the FF and C Act? This might be especially problematic if the government continues to stifle growth with its austerity policy. Would the solution be to mint larger and larger amounts of platinum coins? Sort of an incremental HVPCS plan?

    • Joe Firestone

      Hi Sunflower. You’ve asked three questions:

      — what would happen if the debt ceiling were eliminated and the debt kept growing?

      Nothing would happen to the capacity of the Government to deficit spend. Neither the level of debt nor the debt-to-GDP ratio affects the fiscal capacity of a fiat sovereign government to deficit spend.

      On the other hand, given that people don’t understand that public debt is the functional equivalent of growth in savings accounts in banks, there will be a growing political problem coming from austerity propagandists about the unsupportable burden on our grandchildren.

      — What would happen if the deficit kept growing?

      Nothing at all would happen if the deficit were incurred without debt instrument issuance, but with platinum coin seigniorage, except that people would become educated about the idea that running deficits doesn’t mean increasing debt-subject-to-the-ceiling.

      Once the public becomes educated about this, then austerity politics will no longer be viable because people will know that deficit spending won’t produce insupportable burdens on their grandchildren

      — Would the solution be to mint larger and larger amounts of platinum coins? Sort of an incremental HVPCS plan?

      The solution to what? The best solution to the Government’s meeting its deficit spending obligations is to use PCS rather than debt, whether or not the debt ceiling is removed. But the best solution to the problem of ending austerity politics is to use HVPCS right now to demonstrate to people that the debt issue is a thing of the past and the Federal Government has all the money it needs to implement Congressional deficit appropriations even if these are large enough to create full employment and solve many of our social and economic problems.

      Incremental HVPCS isn’t a good solution for that because it will take a few years for people to get the idea that we don’t have to use debt. Meanwhile, we can have more austerity, more unemployment, more deaths due to lack of insurance, more bankruptcies, broken families, etc.

      • Auburn Parks

        Hey Joe,
        I would like to make a suggestion to everyone with regards to framing the ‘debt’…..I don’t know if this was first pioneered by Roger Malcolm Mitchell or not but I have found it to be effective. When talking about the debt, I think it’s much better to refer to it as savings deposits at the Fed bank. For example, instead of saying “we need to stop increasing our national debt” we should all get into the practice of referring to it as “stopping new savings deposits at the Fed”. Even though I absolutely hate everything that Frank Luntz’s politics stand for, the man does have a point about how effective simply changes verbiage can be when spreading propaganda, manipulating the language and the psychology of different political memes. The deficit terrorists fight ‘no-holds barred’ and have hundreds of millions of dollars to back them up, the least we can do is alter our language use to better manipulate the conversation in our favor….just a thought…..great post by the way.

        • Joe Firestone

          Hi Auburn, I like the suggestion up to a point. In fact, I wrote this one some time ago to suggest an alternative nomenclature. However, there’s a need to communicate as well especially when laws are involved. For example, If I entitled this post “Mr. President, End National Credit Ceiling Hostage-taking for Good!” people wouldn’t have the slightest idea what I was talking about unless they read the above post.

          Similarly, if I referred to their deficit projections, as CBO’s Government Addition projections, they’d have the same problem. So, the change in labeling is a good idea, but it has to be done in the right context and it has to happen gradually, otherwise we’ll just sound strange.

          • Auburn Parks

            Of course on the context, 100% agree……my point would probably be better made as “when at all possible, we should try to use language to our advantage, as manipulating language and psychology to better spread ideas or brands is extremely effective and something we all need to consciously try to use to forward our perspective…..Propaganda works.”

            And referring to the debt as deposits at the Fed whenever realistically possible is but one small part of the effort to re-frame the debate surrounding Govt expenditures (RE: MMT).

      • Mark Robertson

        What would happen if the debt ceiling were eliminated?

        We’d have a much stronger economy. Actually the “debt ceiling” has been eliminated in the past. On 3 Jan 1977, Richard Gephardt (D-Missouri) arrived in the U.S. Congress for the first time, and was dismayed at the madness of the debt ceiling charade. House Speaker Tip O’Neill told Gephardt to work with other Congressmen to get rid of the “debt ceiling.” Gephardt succeeded, because Democrats controlled both houses, and for the next 16 years we were mercifully spared the debt ceiling charade. In 1995, Republicans took back control of Congress, and presented their austerity attack (“Contract With America”). Republican criminals like Newt Gingrich and Tom DeLay, along with John Boehner, re-introduced the debt ceiling debacle, and we’ve had to live with it ever since.

        Fortunately the Treasury is always able to resort to “extraordinary measures” (that is, the Treasury continues to create money on its keyboard out of nothing, like always).

  4. Wouldn’t the bill give the Treasurer unlimited ability to meet all spending obligations? It is true that these new obligations cannot be used directly to make payments for anything other than government debt and Social Security payouts. But the key point is that these new obligations don’t count against the limit. So if the Treasury always has a sufficient stock of ordinary short-term debt, all it has to do is pay off some of the short-term debt with the new obligations, thus bringing the debt subject to limit down below the ceiling, and then issue new debt to raise the funds to carry out all the other kinds of spending.

    Also the law says that one of the things the treasurer can use the new obligations for is to pay off any other obligations “held by the public”. These new obligations themselves would be obligations held by the public, so you could keep paying the obligations off with new obligations.

    A few questions:

    What would the maturities on the obligations? The bill doesn’t say, so does that mean its entirely up to the Treasurer?

    Are the obligations negotiable? If so then they can easily become a form of money. It would be a kind of perpetual promise for “legal tender” which need never be kept but can be continually recycled.

    So it looks good to me so far. The bill effectively gives the Treasurer the ability to print a new kind of money with which it can permanently manage the debt ceiling. It issues the new kind of debt to pay off the old kind of debt, issues the old kind of debt and swaps it for legal tender, and pays its other bills with the legal tender. If it prints up the obligations on fancy paper in more or less the shape of federal reserve notes, then it doesn’t matter whether it is called “legal tender”.

    • Chapter 31 of Title 31 of United States Code refers to debt. So the new obligations are also debt. I think, in a very longwinded way, they are saying the debt can grow beyond the limit if the sole purpose of the growth is to meet the obligations on already incurred debt held by some.

      If the new debt also finds its way into the hands of the same category of people obligations to whom can be met by this exemption, the treasury is free to keep raising more debt to do so. It is not authorising the treasury to create any new kind of currency. In fact I will be surprised if all the US debt doesn’t make into the hands of these people (obligations to whom will continue to be serviced, while those to the rest will likely be defaulted) or the Fed, with the latter simply having to update its books by writing those assets off.

      So we might see other holders of US government debt starting to sell their holdings to the preferred holders at a discount.

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