The United States is weeks away from hitting its debt limit. Although the country has technically (and accidentally) defaulted once before, if the House of Representatives and the Biden administration can’t come to an agreement about future government spending and borrowing by early June, it would be the first time Washington, D.C.’s intractable political morass sacrificed the full faith and credit of the federal government for political ends.
Over the weekend, the Financial Times reported that President Biden signaled that he had made some progress in haggling over spending cuts demanded by Speaker Kevin McCarthy in exchange for raising the congressional debt limit. However good that news may be, it’s unclear whether any deal McCarthy strikes will actually get approved by his hard-line contingent — recall it took 15 ballots for McCarthy to get his leadership position, which came in exchange for allowing any Republican to vote to end his Speakership. On Wednesday, that embodiment of right-wing id known as Donald Trump pushed Republicans to default, which only makes the odds of a deal slimmer.
There’s a growing sense of foreboding on Wall Street that the political process is irrevocably broken with Jamie Dimon, CEO of JPMorgan Chase, warning that a default would be “potentially catastrophic.” It would mark a clear before and after period in the history of the country— the anno defecti, if you will — that would do nothing but accelerate the concerted effort to erode to centrality of the U.S. dollar to the global financial system.
What is to be done? I spoke with Amar Reganti, who was a deputy director at the U.S. Treasury’s Office of Debt Management during the last two major debt-ceiling standoffs in 2012 and 2013 and is now an investment director and strategist for Hartford Funds, which manages more than $120 billion. We talked about work-arounds, gimmicks, and the various means the federal government has available to remain in good standing on its debt.
The 14th Amendment
So far, the most likely alternative way for the White House. The text of the 14th Amendment, passed in the wake of the Civil War, says that the validity of the public debt “shall not be questioned.” On Tuesday, Biden said he was considering invoking it in order to get around McCarthy. But it’s not a slam dunk. Treasury Secretary Janet Yellen calls it “legally questionable.” (Yellen has advocated for the White House to essentially reverse the stakes in the negotiations, where Biden would unilaterally raise the debt limit and force Congress to disapprove it).
The fact that it’s being spoken out loud by the White House — regardless of whether it’s a mere negotiating tactic — is a sign of political progress on the issue. “What had been said in the Obama administration is that there’s only one way to raise the debt ceiling, and that’s to raise the debt ceiling by Congress,” Reganti told me. “If you read the 14th Amendment, it kind of makes sense. It basically puts the willingness to pay our sovereign obligations almost past statutory control.”
The problem with invoking the 14th Amendment is the legal risk involved. It’s never been put to the test, and everything from how it would work to who would have standing to sue is up in the air. Legal experts have noted that, in the worst case scenario for Biden, the Supreme Court could interpret the amendment’s wording so narrowly that the country would effectively be in default. And even if it ultimately clears the Supreme Court — effectively nullifying the debt limit for all future uses — there would still be confusion while it was litigated. “The 14th Amendment would probably be actually a little bit more tumultuous,” Reganti said. While the Treasury would still likely find debt buyers — many investors, like pensions, have few choices — taxpayers might ultimately have to pay more in interest payments on those bonds until the matter was settled.
Mint the Coin
The U.S. has laws around creating money. When it comes to currency, the government cannot just flood the market with newly created dollars and coins. Nor can it create new dollars in wild denominations. But there is a loophole. There is no limit to what the U.S. Mint can stamp on a coin made out of platinum bullion. It wasn’t meant to be a work-around — it was supposed to allow the Treasury to make money off coin collectors. But the wording of the law left it ambiguous enough that the U.S. Mint could create any amount of money out of thin air, as long as it was stamped into platinum.
The calls to mint the coin have been around for more than a decade and gained traction during the 2011 and 2013 debt-limit standoffs, when the Obama White House sparred with McCarthy’s mentor and predecessor, John Boehner. It’s also gained popularity online, where #mintthecoin has become a rallying cry championed by the likes of Bloomberg’s Joe Wiesenthal and economist Paul Krugman. And there’s something very satisfying about just creating a coin. The U.S. Mint in Philadelphia would press a bunch of platinum into a circle, put it into an armored truck, drive it 138 miles south to the Federal Reserve building in Washington, D.C., and then voilà, crisis averted. The Fed would likely be obligated to accept the coin, which would increase the sum total of currency coursing through the economy — giving the federal government another $1 trillion in cash to pay off debts.
“The coin would be operationally probably more simple. It’s unclear exactly how a legal challenge to that could actually take place,” Reganti said. Even though this is a somewhat antiquated process of creating money, Yellen has called minting the coin a “gimmick,” and Biden said he wasn’t going to consider it.
Then there are the technical fixes, the kinds of financial wizardry that can give the government a little bit of breathing room, but are akin to moving money around by creative application of accounting rules. (Again, gimmicks can be good, but some have tighter limits than others.) This gets at the heart of what the Treasury does: issue bonds and bills, financial instruments that pay interest over time in order to borrow money from the market. One solution is issuing bonds that, essentially, don’t count under the national debt. One type of debt, called a perpetual bond, would likely pay out a higher interest rate in perpetuity and the bondholder never gets the principal back. The other, called a premium bond, would revive old debts at much higher interest rates — essentially stretching the country’s current debt load a little bit further. This gets around the debt ceiling because the statute is limited to the principal amount, not the interest that it pays, as Matt Levine at Bloomberg has pointed out. So why not issue debt at, say, 105 percent for a year? Or 1,005 percent? The idea here is that the buyers will pay more, because they plan on getting back all that money and then some. The Treasury gets a short-term burst of cash that it has to eventually return, but it can use that money in the meantime to pay off its debts.
To Reganti, these are among the least likely options. Issuing a new bond is something that requires years of study, he said — because U.S. debt is the foundation of the global financial system, the Treasury takes its time to understand how a new type of bond could potentially unsettle broader markets. “The issuance of a brand-new security on a whim, first of all, would cut against the grain of how the department’s thought for decades, going back to the Volcker years, when he was undersecretary of domestic finance, when ‘regular and predictable’ became a mantra,” he said. The other problem is that managing the country’s $31.4 trillion in debt is extremely complicated, and Treasury’s systems can’t be upended so quickly to handle unusual new bonds. “It’s just very unclear operationally, both from an auction perspective and then from an ongoing payments perspective, the systems that could handle that, and those things don’t turn on a whim,” he said.
On Friday, debt-ceiling talks were canceled, but it’s not like they were going anywhere, anyway. Any of these options has a chance of working, at least for a little while. Or all could fail spectacularly. Still, politics is full of gimmicks. Obama used accounting gimmicks to pass the Affordable Care Act. Trump revolutionized the use of gimmicks in office, like dismantling regulatory rules through a little-used law and closing borders to Muslim countries on a flimsy pretext that was, nevertheless, upheld by the Supreme Court. The debt ceiling itself was a gimmick — a way to make Congress do less work and let the Treasury fund the government. With just six calendar days left for McCarthy and Biden to find a solution, gimmicks might be the only solutions left.