As the issuer of the dollar, the US government can never “run out of money”: there are no bills coming that it can’t afford to pay, nor can it become insolvent on its outstanding debt, regardless of how big it may be, in absolute terms or in relation to GDP. As Trump said in 2016: “This is the United States government. First of all, you never have to default because you print the money.” For all his other faults, on this he was right — even Bernie Sanders recently was forced to admit that “even a broken clock is right twice a day”. In other words, the recent crisis was entirely of the US’s own making, stemming as it was from a rule — the debt ceiling — that it imposed upon itself.
Indeed, the US is only one of two countries in the world with a rule of this kind — the other is Denmark, where it has never been used in political brinkmanship. In America, the debt ceiling was created in the early 20th century in the hope it would make government run more smoothly: Congress no longer had to ask for permission each time it needed to issue debt to pay bills. In recent years, however, several policymakers have suggested that the rule has become more trouble than it’s worth, insofar as it allows political bargaining over policies that Congress has already approved. In 2021, for instance, Yellen herself claimed that “it is very destructive to put the president and myself, as Treasury secretary, in a situation where we might be unable to pay the bills that result from those past decisions”. At least two other former Federal Reserve chairmen, Alan Greenspan and Ben Bernanke, as well as four former Treasury Secretaries, have expressed the same opinion. In short, there is no technical reason for the debt ceiling to exist, and it could have been legislated out of existence while the Democrats had full control of Congress.
But given that the debt ceiling does exist, does this mean that the risk of default was real? For much of the media, it was an open-and-shut case. “Because the United States runs budget deficits — meaning it spends more than it takes in through taxes and other revenue — it must borrow huge sums of money to pay its bills”, as the New York Times puts it. In fact, the US, like every currency-issuing country, doesn’t need to borrow its own currency to finance its fiscal deficit: from a technical standpoint, the government spends first and then issues bonds to “cover” the resulting deficit. This serves many purposes, largely pertaining to monetary policy — but “raising funds” is not one of them.
Much like the debt ceiling itself, the decision to match the deficit with debt is a voluntary choice, not a technical (or legal) one. Some years ago, for instance, former Fed chair Bernanke suggested that the Treasury could simply instruct the central bank to credit accounts on its behalf, without matching the fiscal deficit with debt issued to the private sector or central bank. It’s unclear why a similar measure couldn’t be adopted today to circumvent the debt limit. Another possible solution would be for the Fed to extend a line of credit — an overdraft — to the Treasury. There doesn’t appear to be any legal obstacle prohibiting the Fed from doing this. After all, if it can bail out the banks, surely it can bail out the US government?
And this is hardly the only solution: a number of creative remedies have been concocted in recent decades — perhaps none more tantalisingly inventive than the $1 trillion platinum coin. In 1997, a newly passed law gave the Treasury full unilateral authority to mint platinum coins of whatever value. Yellen could therefore instruct the Federal Reserve to create a coin worth $1 trillion, and then deposit it with the Fed, thus adding $1 trillion to the Treasury’s account at the central bank. The government could then draw on this account to pay its bills without having to issue new debt. The idea was first put forward by a blogger in 2011 — leading to the hashtag #MintTheCoin going viral on Twitter — but has since captured the imagination of academics, pundits and policymakers. Even Philip Diehl, the former head of the US Mint, has described it as “ingenious”.
Yellen, however, recently dismissed the trillion-dollar coin as a “gimmick” — and this may be true. But if the US is now in a position where it has to consider “gimmicks” to avoid a self-engineered default, it is only because it has chosen to impose upon itself a series of legal constraints that inhibit its ability to utilise its currency-issuing capacities.
Meanwhile, next time a debt ceiling crisis emerges, a less unorthodox, but potentially even more controversial, solution would be simply for the government to ignore it and continue to issue more bonds. In doing so, it would be violating the law, but the government would also be violating the law by refusing to honour public spending already authorised by Congress. As economist James Galbraith has noted, at that point, all such spending is an obligation: “The debt ceiling statute does not authorise the breach of any obligation,” he wrote.
Proponents of this solution also point to the 14th Amendment of the Constitution, which mandates that all the government’s financial obligations be met. According to a number of constitutional law experts, this renders the debt ceiling unconstitutional. Like the trillion-dollar coin, in recent years, the 14th-Amendment theory has gone from “fringe” to “mainstream”. In the past, Nancy Pelosi and former President Bill Clinton both urged Obama to invoke the 14th Amendment during his debt ceiling showdowns. For law experts Neil Buchanan and Michael Dorf, this would be the “least unconstitutional” option — that is, less unconstitutional than the US government defaulting on its obligations.
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