Mint a trillion dollar platinum coin, pay massive interest on cheaply priced debt, or let the central bank pull the coals from the fire. This is how the US government can fight an irrational debt crisis and create itself.
It seems crazy that the United States will not succeed in raising its debt ceiling in time, because otherwise it would bankrupt one of the richest countries in the world. However, this is exactly what will happen.
On January 19, the United States reached an arbitrary debt limit which is 31381 billion dollars On top of it can not add an extra dollar of debt. Bankruptcy has been avoided for the time being thanks to tricks by the Ministry of Finance, which, among other things, has deferred contributions to state pension funds. But this expanse is not infinite. At the beginning of June, the money was already going to run out. In this case, the debt limit must be increased, or there are not enough funds to pay off the government’s outstanding debt.
About the author
Dan Pallegier is an economics correspondent at The Washington Post De Volkskrant. He writes about financial markets and central banks, among other things. in interest capital It delves into exciting and fascinating economic events.
There is a legal way out of the new expenses. The Biden administration could invoke the Fourteenth Amendment to the US Constitution, which states that “the validity of the public debt of the United States […] There shall be no dispute.” But that would guarantee a constitutional crisis, and the question is whether Biden feels that way.
Other tricks to prevent bankruptcy can be imagined. For example, the US central bank can buy government bonds whose repayment is imminent. The Federal Reserve actually investigated this scenario ten years ago, as it turns out Recently released conference call From 2013, when central bankers had to worry about the debt ceiling.
However, is it an option the Fed wants to put into practice? Jerome Powell, the then-conservative current head of the central bank, said at the time that he would find such a move “appalling” but acceptable “under certain circumstances”. Consider ambiguity an advantage. If the Fed makes it very clear what it will do in this case and at what time, politicians will feel less pressure to actually raise the debt ceiling.
The finance minister cannot be completely reassured, although Janet Yellen was the director of the central bank ten years ago and was therefore also present at that meeting. Her ministry has other options it can explore to avoid bankruptcy.
For example, Yellen can use a Vague legislation (which was actually intended as a trophy) to mint a $1,000 billion platinum coin. If the Treasury Department then pledged this currency to the Federal Reserve, it would have enough money to pay the bills.
However, this strategy is not without risks. The Fed may reject the currency because it is clearly a political maneuver that would raise serious doubts about the independence of the central bank.
Then another hoax has a better chance, because Jerome Powell and his teammates can’t be too hard about it. It is necessary here that the debt limit only limits the outstanding government debt. Thus, future obligations to pay interest are excluded.
This makes it possible for the government to issue debt securities at a low face value, but at a high coupon. Instead of collecting $100 on a 10-year bond at 3.6 percent, the government could offer an interest rate of 15.6 percent on a $100 bond. Investors would then be willing to pay $200 for it (i.e. an above par issue). At these percentages, the yield to maturity is exactly the same for both bonds.
Each time $100 comes due, the Treasury can pay it off by selling $100 of the new debt for $200, creating additional room for spending. This seems much easier politically than the platinum coin, precisely because it is more difficult to understand. For example, the Ministry of Finance could talk about a “temporary solution” to avoid bankruptcy.
It is clearly not good for US credibility in financial markets if the country finances itself with accounting tricks. Common sense dictates that a solution will emerge before the time is up. At the same time, this absurd debt limit would never have existed if only common sense was used, because it is a matter of financing expenditures approved by the US Congress itself. It will be exciting days.
