On its face the debt ceiling is a farce in the present-day economy. Its roots lie in laws passed during World War I when the US was still on the gold standard. Its effect is to deny the administration the means to accomplish spending already approved by Congress. It is unlawful for the administration to refrain from making approved expenditures; at the same time, it is unlawful to exceed the debt ceiling. Something has to give, and two viable options exist.
|Natural log of net private savings|
“The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”
Although it appears to the layman that this would render the debt ceiling unconstitutional, legal scholars have argued both ways on the issue. So far Obama has refused to take up the fight, which might be litigated finally by the Supreme Court. During litigation Obama could boldly pay the nation’s bills.
Second, and preferable, a two-year old proposal to mint a $1-trillion platinum coin1 has resurfaced. Legal scholars have generally agreed that it would be legal for the Treasury to mint such a coin. Economists, including highly regarded Paul Krugman, have conceded the economic feasibility of the coin solution.
The Treasury, by law, can create coins as money out of thin air and a bit of metal just as the Fed can create money out of paper (or computer keystrokes). After depositing the coin in its checking account at the Fed, the Treasury could then write checks on its account without borrowing. Of course, many people, who know neither what money is nor how it works, were aghast at such shenanigans while, at the same time, apparently comfortable with the farcical dilemma presented by debt ceiling.
As the Treasury pays bills out of its coin-enhanced account at the Fed, bank reserves increase. Eventually, if the Fed decides to undo quantitative easing, which also increased bank reserves, it will have to sell Treasury securities to drain the excess reserves. Only at that time, all excess reserves including those enabled by the coin would be converted into Treasury securities that we call debt. That is, excess funds in bank reserve accounts would be converted into savings accounts.
To date, Obama has rejected both the 14th Amendment fight and the platinum coin loophole as means to obliterate the debt ceiling threat forever. Instead he is permitting the Republicans to use this irrational debt-ceiling weapon whenever they like.
In failing to challenge the debt ceiling he is allowing himself or the Senate to be coerced into cutting benefits from the cherished safety nets of Social Security, Medicare, and Medicaid. Perhaps, that is what he wants.
1. With fiat currency the nominal value of the piece of currency does not depend on the market value of the material of which it is made. The difference is called seigniorage and is profit for the Treasury.