Category Archives: Debt Limit

The Agreement: What I’d Like to see–no more debt ceiling

AMAN to this!  What is the logic of allowing politicians to vote on programs that require funding, vote on taxes to do so AND THEN VOTE ON BORROWING WHEN NEEDED TO BE CONSISTENT WITH DECISIONS ALREADY MADE!  Politicians do not need an opportunity to grandstand, and that’s all the debt ceiling does.

This is what I’d like to see (and many other analysts and economists would too):
• Eliminate the “debt ceiling”. It is superfluous. As former Fed Chairman Alan Greenspan and others have said, the “debt ceiling” is just arithmetic. We have approved expenditures. We have revenue. The shortfall is borrowed. If we don’t get rid of the debt ceiling, increase the level through 2014.
• Pass a Continuing Resolution (CR) for fiscal 2014 that reduces the impact of the sequester. As Republican advisor Mark Zandi said last week:

As part of any budget deal, lawmakers should reverse the sequester. The second year of budget sequestration will likely have greater consequences than the first, affecting many government programs in ways that nearly all agree are not desirable. A sizable share of the sequestration cuts to date has involved one-off adjustments, but future cuts will have to come from lasting reductions in operational budgets.

• In the long run (not this decade), the US will be challenged by health care costs.  This requires some adjustments to both spending and revenue.  As Mark Zandi said last week:

It would of course also be desirable for lawmakers to address the nation’s long-term fiscal challenges. … Both cuts in government spending and increases in tax revenues will be necessary to reasonably solve these long-term fiscal problems.

As I noted last week, perhaps another super-committee with long term consequences if the committee fails (not more short term cuts like the sequester). The consequences should be distasteful to both parties – and both cut spending and raise revenue in the long term so there is some motivation for the committee to reach agreement.
• It is important to note that the deficit is declining, and declining rapidly. Over the next few years (the short run), the deficit will not be a problem (great news!), as long as the economy continues to grow (government shutdowns and threats to not “pay the bills” hurt the short run).
Final comment: It is sad, but predictable, that this shutdown and threat to not “pay-the-bills” is happening now.  As Goldman Sachs chief economist Jan Hatzius wrote in April:

The federal budget deficit is shrinking rapidly. … [T]here is still a great deal of room for the economic recovery to reduce the deficit for cyclical reasons. … In our view, the most important implication from the reduction in the budget deficit for the near-term economic outlook is reduced pressure for further fiscal retrenchment.

In another year, the House will have lost the short term deficit as an argument (actually for those paying attention, the short term deficit is no longer a serious concern). However this doesn’t mean we shouldn’t pay attention to the long term issues, and maybe we could find some common ground on moving forward on those issues – without hurting the short term.

The Agreement: What I’d like to see
Bill McBride
Mon, 14 Oct 2013 16:10:00 GMT


The deadlock/shutdown/debt ceiling

Among our fervent GOP friends should be consideration of this: if the affordable care act had not been enacted in 2010, and Obama had been defeated in 2012, but the senate remained in the Democrat’s hands, would they refrain from calling it blackmail if Harry Reid via senate procedure bottled up the budget, caused a government shutdown based on insistence that the ACA, seemingly a settled issue, be brought back from the grave before the government could go on with its business?  They will insist otherwise, I think, but only by being dishonest with themselves.

Basically, they’ve convinced themselves that the ending “Obamacare” is so important that the end justifies the means. Terms like hostage taking, terrorism, or I think suicide bombing best fit the GOP’s behavior at this point.  This mindset has already become dangerous, but with it now bleeding into the debt ceiling issue, the stakes and the dangers seem much grater.   I think we may weather a  failure to raise the debt ceiling better than the most alarmist claims, but I ‘d prefer not to test  if I’m right all the same.

Too Much Blame to go Around

No one has distinguised themselves in the debt limit fight.  Let comment one by one.

President Obama – He’s failed on at least two counts.

First, he should have done something with the debt commission results he received at the start of the year.   As a liberal Democrat, I think he had more credibility to address entitlements than any Republican.  Like Nixon opened up China he could have taken steps that moved us well ahead in dealing the debt.  Did he?  No, he walked away from his opportunity.

Second, He’ negotiated so badly that he’s asked the Republicans to keep upping their demand.  If Obama had any backbone, I think the Republicans would decide they had a deal as good as they can get, AND SHOULD TAKE IT.

House Republicans – They seem to have showed themselves to be more dangerous than we could have imagined.

First, they don’t seem to understand the risk they’re putting the entire country at.  Many seem to take talk radio as their expertise.

Second, their leadership it now seems clear don’t really speak for them.  Boehner can’t seem to deliver the Republican votes.  Obama I think has contributed to this.

Third, they’re in politics but don’t seem to know what Politics is.  Politics is finding ways to accommodate different points of view.  It recognizes diversity of opinion as a reality, whether you like it or not.  The house Republicans do not understand and are making it impossible for the US government to function.

Loose Change

Well you can joke that President Obama should be going through the White house sofas looking for loose change.  Actually, that may be a way to at least buy time agains the debt limit impasse.  Brad DeLong suggests this.  I’m not sure trillion dollar coins are needed, as maybe $500,000,000 might buy at least a week or two.  Other ways to go might include selling gold.

That seems to me the only way that he can faithfully execute all the laws. Otherwise, he has to break some–or have the Treasury Secretary violate his fiduciary duty as trustee of various trust funds.

Minting high-denomination platinum coins, by contrast, creates no such problems. And is completely legal.

I suggest that he immediately mint 50 ten-pound liberty-head coins, each of them denominated at $100 billion, and temporarily store them in the Treasury Secretary’s office. Then the Treasury Secretary can take them up one at a time to the Federal Reserve Bank of New York in a special armored train as required.

Think how much money the federal government could make from the movie rights alone..,

Matthew Yglesias:

The Platinum Coin Option: I keep hesitating to write about this because it sounds insane, but Jack Balkin’s a professor at Yale Law School so I’ll let him say it:

Sovereign governments such as the United States can print new money. However, there’s a statutory limit to the amount of paper currency that can be in circulation at any one time. Ironically, there’s no similar limit on the amount of coinage. A little-known statute gives the secretary of the Treasury the authority to issue platinum coins in any denomination. So some commentators have suggested that the Treasury create two $1 trillion coins, deposit them in its account in the Federal Reserve and write checks on the proceeds.

It’s right here in 31 USC § 5112 “Denominations, specifications, and design of coins.” It’s super-prescriptive about all kinds of things until you get to section (k):

(k) The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.

It actually seems to me that there’s a colorable argument that President Obama is legally obliged to order Secretary Geithner to order the mint to start creating large denomination platinum coins. The debt ceiling is legally binding. We can’t borrow any more money. But at the same time, the Social Security Act is still valid. There are appropriations bills that extend through September. The assumption is that starting August 2, the Treasury will start “prioritizing” payments. But whence the legal authority to do that. By contrast, the legal authority to mint platinum coins is right there in the statute. This would, I assume, lead to a downgrading of American sovereign debt.

I would furthermore say that by the failure of President Obama to have taken this step last month he has already violated his oath of office. One of the laws he is required to faithfully execute requires that he prevent the debt of the United States from being questioned. Yet by his inaction the debt of the United States is, right now, being questioned–and is being increasingly questioned more and more as time passes.

The President’s Obligation to Take Care That the Laws Be Faithfully Executed Requires Him to Start Minting Large-Denomination Platinum Coins
J. Bradford DeLong
Fri, 29 Jul 2011 01:17:57 GMT

14th Amendment a Serious Option?

I’ve wondered is this a question of the 14th amendment.  Given that Congress has appropriated funds, and passed laws requiring spending, but then said don’t borrow, doesn’t President have to violate some laws.  As such, in choosing to violate the debt ceiling wouldn’t the President be acting in his executive role and consistent within separation of powers.

President Barack Obama claims to have ruled out using the 14th amendment, and if you read the statements of his Press Secretary and the President’s own words, you’d be forgiven for believing that it’s not an option.

However, in politics you never look at just what the principles are saying, you look at what they are doing, and the potential impact of what they say.   For instance, President Obama clearly doesn’t want to invoke the 14th amendment.   But if he threatened to do so, the left wing of the Democratic party would mount a concerted effort to stop any negotiated settlement that includes significant debt reduction in the Senate.  Obama had to convince his own party that they did not have the 14th amendment as a fall back should negotiations fail.  That would be necessary to get them to vote for a last minute compromise.

This also suggests that Obama wanted to reach a “grand compromise” with significant budget cuts, and may still through back channels and secret talks be headed in that direction.   His public schedule has been empty, but full of private and unpublicized meetings.    Things are brewing, but we don’t know what.

The 14th amendment reads in part: 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.   The President could say that the constitution by stating that the validity of the public debt should not questioned, requires that it be paid.   The only way to do that, and continue spending money the Congress voted to spend, is to raise the debt ceiling.   The interpretation is plausible enough to not be “over the top,” even if weak.

I do not think it is a winning argument.  Article 1, Section 8 gives Congress the power to pay debts and borrow money.  One could argue that Amendment 14 altered this by adding to the President’s power by saying the validity of the debt should not be questioned.  An historical read of this amendment, however, clearly weakens that claim — it is focused on the Civil period and its aftermath.   Nonetheless a literal interpretation (e.g., just the text, not historical context) at least creates an opening for that argument.

Some people claim that President Truman invoked the 14th amendment to raise the debt ceiling.  That isn’t true.  He used the amendment to integrate the military, but during his Presidency there was no increase in the debt ceiling.   In fact, since the debt ceiling was created in 1939 Truman is the only President not to have raised it.    Most have raised it five to seven times, though Ronald Reagan’s years brought 17 debt ceiling increases – not surprising since the Reagan years saw the biggest relative growth in debt in US history.

But for politics the issue becomes murky.    First, President Obama knows the constitution well, having taught it.  He may believe that it is his duty not to violate the interpretation he believes correct, and thus he may have already completely ruled out using the 14th amendment.   That would make him a politician of rare integrity, since for most the question of legality gets replaced by one of political realism — will it work, and can I get away with it.

To the latter, despite Republican calls for impeachment should he go that route (something that might actually help Obama in 2012), he can get away with it legally.   The Senate will never convict him if impeached, and at least until the Supreme Court rules, he could do it.    Could it hurt him in 2012?   That’s harder to say, and separate from the legal issue.   The President would frame it as a matter of leadership and doing what is necessary to protect America from Republicans who would be accused of threatening to do more harm to the US than Osama Bin Laden did on 9-11.   The Republicans would frame as a power grab by a leader who wanted to do things his way, regardless of the rules.   If the country believes the President, he’d win in 2012.   If the GOP convince the public he was out of line, he loses.

The GOP position now is weak due to the reputation the House has of extremism and refusing to compromise.   The GOP is in danger of looking as they did back in 1999 against Clinton when their over the top attacks backfired and helped the President increase popularity.   Of course, Clinton had a booming economy going for him, something Obama lacks.   If the Court ruled against him (something I would consider likely) that would aid the GOP argument and send a weakened Obama into the election.   In fact, if things got that bad Obama might give an LBJ like shock speech, announcing he would not seek the nomination due to the divisiveness of economic battles, perhaps opening the door for Hillary.   (That is not a scenario likely at this point!)

However, looking at the possibilities, it comes down to this: how serious is the threat to the economy, and how well can the US handle either a default, government shut down (which would come from using the available money to avoid default — a huge chunk of the government could not be paid for), or downgrade in the bond rating.   If the threat is serious, the President might decide that it’s worth risking his re-election on doing whatever possible to avoid that outcome.    He could try to couple that with a renewed effort to get significant spending cuts passed to get a debt limit ceiling raised (for longer than six months — which would do no good, really).   If that got passed before the court ruled, it would be worth it.   But more things could go wrong for the President than right, under that scenario.

On the other hand, new voices calling for invocation of the 14th amendment might have a political aim.   If this option once again appears plausibly in the Presidents arsenal, House Republicans (especially moderate Republicans) would realize that their capacity to force the President to do their biding by holding the economy hostage declines.   This would create a real push for an alternative deal that saves face for everyone and avoids clear winner/loser scenario.

Politically, Speaker Boehner has staked everything on his plan, and the drama of getting his own party support it sends a message to the White House and Senate — this is as good as you can get, we had to work to get this!   President Obama has vehemently opposed setting a rehashing of this chaos six months from now.   If either one gets their way completely, one comes away wounded.   Neither will accept that, making a stand off likely.    However, if McConnell, Reid and other power brokers can figure out a face saving deal that can pass and cannot be seen as a clear victory for either side, that will resolve the crisis.

So is the 14th amendment a serious option?   Yes, but only as a last resort, and perhaps not even then.   If it comes to that, it’ll be a very entertaining year in politics coming up, but that would not be good for the country.

14th Amendment a Serious Option?
Scott Erb
Thu, 28 Jul 2011 03:51:58 GMT

What Happens if We Don’t Raise the Debt Ceiling?

One the best overround ups of how the worst case could unfold, that I’ve seen.

So the tone of my posts railing against default seems to have conveyed one of two false impressions to many of my readers:  that I believe there is now a 100% chance that we will fail to increase the debt ceiling; and/or that I believe a failure to raise the debt ceiling will be a catastrophe on par with 6-mile asteroids and volcanic eruptions the size of modern Iran.

Since neither of these is the case, I thought it was probably time to write down what might unfold over the next few days.

I’ll start by saying, however, that I have no idea whether we’ll get a deal or not.  There is one thing I’m sure of:  Obama is indeed bluffing with the veto threat, and badly.  They could send him a repeal of Obamacare attached to a debt ceiling increase, and he’d sign it.  He is not going to endanger our credit rating, or social security checks, in order to prove a point.

Beyond that, I have no idea what is going to happen politically.  Either the GOP is going to pass the Boehner bill, go into conference with the Senate, and come out with something Obama will sign–or they won’t.  I tend to think they will because it would be so damn crazy not to.  On the other hand, I thought Democrats were going to back off on health care because it was so obviously career suicide to pass the thing.  And I was right–it was career suicide.  But they passed it anyway.  After a certain point, these things take on a life of their own: it’s hard to back down when you’re so publicly committed–and when something you want so badly feels like it’s almost in reach.  So who knows.

Then there’s the wild card: will the GOP old guard do a deal with the Democrats if the tea party won’t play ball?  I don’t know.  It would cost them their jobs, but it would be the right thing to do. But it’s hard to get people to do the right thing when it will cost them their jobs.

But okay, let’s say they don’t pass anything, what then?

Here’s what I think I know about what will happen:

  • August 2nd isn’t the date when we can no longer pay all of our obligations.  But it is quite close to the date.  When the next round of social security checks goes out, the government will be out of money
  • We will almost certainly pay the interest on our national debt, military payrolls, VA benefits, and Social Security.  That is going to leave precious little money for anything else.
  • Standard & Poor will downgrade our bonds.  Fitch and Moody’s, however, are not going to downgrade us unless we actually default–which, as I’ve said, I don’t think we’ll do.
  • Economics of Contempt argues that this will actually have less impact on markets than people are predicting, because most contracts and regulations that require institutions to buy AAA rated securities do not force those institutions to sell unless two out of three of the agencies have downgraded.  As long as Fitch and Moody’s hold the line, we won’t see the absolute chaos that would follow a downgrade of the US short-term credit rating from all three.
  • Nonetheless, there will be considerable disruption in markets, less because of the direct regulatory problem, than because markets–like the rest of us–like to believe that there is some sheriff in town.  The level of political instability implied by a congress that does not raise the debt ceiling is a level of political instability that makes all financial transactions riskier.  The willingness of people–foreigners especially, but also Americans–to hold our debt will be permanently impaired.  That will be expensive.  Also, voters are going to be unhappy when their 401(k) portfolios start behaving like a manic depressive coke addict in detox.
  • We also don’t know if Fitch and Moody’s will hold the line.  They’re telling reporters they will–but how will they feel in a month?  Who knows?  If they downgraded us significantly, the resulting sell-off just from money market funds could feel a lot like a replay of 2008.  Only this time, it’s not clear that anyone in the government has the authority to step in and stop a run on the money markets; the issue was left conspicuously unaddressed by Dodd-Frank.
  • Geithner will not take the 14th amendment route, not only because its legality is dubious, but also because it would trigger an even deeper political crisis, and quite possibly end with President Obama being impeached.
  • Geithner may have some other gimmick up his sleeve, like minting $2 trillion platinum coins, swapping Social Security treasuries for public debt, or selling our gold reserves. (Good riddance!) If so, expect screaming from the left (he’s raiding the social security trust fund!) or the right (plundering our nation’s vital stores of precious metal), and the thing may drag on for months.
  • If he does not have these tricks up his sleeve, many things people like–a lot!--will probably stop
  • Whatever happens will not last long.  The constituencies which make up the tea party do not necessarily understand how much of their life is underwritten by the government.  But they will.  When the market starts convulsing, and checks stop coming, and states have to do emergency property tax hikes to make up for lost federal revenue, angry constituents are going to mob their congressmen. About five minutes after the first doctor tells a senior citizen that he can’t treat any more Medicare patients until he gets paid, the tea party caucus is going to crawl back to Capitol Hill and beg to pass whatever will make it stop.
  • In the aftermath, we will, over the long term, pay more to borrow money. At least some of that is going to be paid for with higher taxes.
  • Everyone else is probably going to pay more to borrow money, too.  The US is a net borrower, and this sort of instability means paying more to attract capital.  And a whole lot of debt, including fixed-rate debt, is priced off of treasuries.
  • Consumer confidence, already shaky, will take a blow.  It’s hard to say how much this matters, but it certainly matters some; like markets, consumers want to think that there’s someone in charge.
  • This also raises the regulatory risk that the GOP says they care about.  A mildly bad rule that’s stable is better for business than a good rule that changes every two years.
  • The political situation in DC will get even worse.  The last two decades have been market by one party doing something kind of raw to the other party, who then goes even further because after all, look what they did . . . If the Tea Party, and the GOP, precipitate a crisis, then the GOP, and the Tea Party, will pay for it eventually.

So the world is not actually going to end, and I am not buying canned goods and ammunition for my portfolio.


Convulsions in the market, lives disrupted by, say, an inability to actually close on the house you need to sell in order to move cross country and start your new job, higher interest rates, an even more poisonous partisanship . . . these are bad things.  Of course, some bad things will happen to people as we struggle to get this country back on sound fiscal footing, which is what the tea partiers keep telling me when I point this out.

The problem is, this doesn’t put the country back on a sound fiscal footing.  There’s nothing on the positive side of the ledger.  The GOP deals itself a heavy political blow, loses their best chance to repeal the hated health care bill, and kicks a frail economy in the teeth in order to . . . what?  Let Democrats know they’re stubborn and angry?  Hey, guys, message received! 

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What Happens if We Don’t Raise the Debt Ceiling?
Megan McArdle
Thu, 28 Jul 2011 16:41:20 GMT