While raising the US debt ceiling has not gotten as much attention — yet — as the risk of falling off the fiscal cliff, it soon will. The limit will likely be hit by year end. And if Congress fails to raise the borrowing cap, the Treasury would likely run out of money-management options to avoid a default some time in the February.
So what to do? Analyst Chris Krueger at Guggenheim Securities’s Washington Research Group outlines four options. Pay particular attention #4:
1. Traditional Raise. This would involve a straight raise in the debt ceiling without any Congressional strings or new/alternative mechanisms. By using “back of the envelope accounting” the USA burns approximately $100B in debt per month.
2. Raise by Congressional Disapproval. This is the system engineered last summer. Essentially, the Congress passes a motion of disapproval to raise the debt ceiling, Obama vetoes, and the Congress fails to override the veto. Assuming there is not enough votes to override the veto (there are not), the debt ceiling is raised.
3. Constitutional Option. The debt ceiling forcing mechanism could be demolished if Obama invoked the “constitutional option” and unilaterally raised the debt ceiling. The 14th Amendment of the Constitution states the validity of the public debt shall not be questioned. Under this option, Obama would invoke the 14th Amendment and unilaterally raise the debt ceiling – a move that was encouraged by former President Clinton last summer in the height of the debt ceiling stare down. This option would trigger a wave of lawsuits and a likely Supreme Court decision. The biggest problem with going this route would be to – in effect – set up two tranches of Treasuries. Those that are not subject to a legal challenge (issued under the old debt ceiling) and treasuries that are subject to a legal challenge, which would likely trade at a discount.
4. Platinum Coin Option. This is even more theoretical than the Constitutional Option, though some argue that it is a stronger legal option. There are limits on how much paper money the U.S. can circulate and rules that govern coinage on gold, silver, and copper. BUT, the Treasury has broad discretion on coins made from platinum. The theory goes that the U.S. Mint would create a handful of trillion dollar (or more) platinum coins. The President would then order the coins deposited at the Fed, who would then put the coin (s) in the Treasury who now can pay all their bills and a default is removed from the equation. The effects on the currency market and inflation are unclear, to say the least. You would also likely trigger a wave of lawsuits similar to the Constitutional Option and create two tranches of treasuries. Both this option and the Constitutional Option are VERY low probability options
OK, you got me. The platinum coin option is a new one on me. I agree with Krueger that the “effects on the currency market and inflation are unclear, to say the least.” I would rather not find out.
Platinum $1T coins? Interesting…
It seems like it would just be another option of kicking the can down the road for a few years. Ultimately, all this bond manipulation and currency manipulation will catch up.
I also suppose there is a 5th option: the Fed forgives all the government debt they currently fold.
For the record, I said this was an option, not that it was a good option.
It’s an elegant one – default without the legal mess. The mess it would make in the bond markets, even though they would get fully-paid, on the other hand,… (and yes, I did read the modifier).
try to think of inflation as too much demand chasing a stagnant or declining supply.
With unemployment being high businesses slow down production because no one is there to buy it, this was causing deflation at the time of the crash.
Now if you increase employment, you increase production because more people are able to buy more things, and businesses will pump up their factories to produce those things.
The only point at which printing money would cause inflation is if production reaches it’s full capacity.
*with machines and robots doing most of our “producing”, there is the possibility of having unlimited supply for some things.
How about mining some asteroids for a few trillion dollars worth of platinum and then selling that instead of minting coins.
Makes about as much sense.
There’s a literature out there on Platinum coins, and also on the possibility of inflation if they’re used. See: http://www.correntewire.com/beyond_debtdeficit_politics_the_60_trillion_plan_for_ending_federal_borrowing_and_paying_off_the_nat http://www.correntewire.com/coin_seigniorage_a_legal_alternative_and_maybe_the_presidents_duty
http://neweconomicperspectives.org/2011/08/coin-seignorage-and-inflation.html
and the links in these posts. Platinum Coin Seigniorage hit the blogosphere mainstream in July 2011, and then receded again when the debt ceiling deal was done. It’s being mentioned again, because the debt ceiling is again imminent. The first link above; takes care of the debt and the debt ceiling problem for the foreseeable future.
They argue in the link you provide that this would not be inflationary. If this is true, I ask you, why do we have any taxes at all? Shouldn’t the US Government simply mint a coin every year to cover that year’s expenses and deposit it into the Federal Reserve?
Except for the fact that it’s Congress that has the authority to mint coins, I only see hyperinflation as the problem.
Then again, given Obama’s general disregard for the Constitution and hyperfinlation,….