Mint the Coin: The Debt Ceiling is an Absurd Problem. It's Time for an Absurd SolutionRoundup
tags: debt ceiling, Senate, fiscal policy
Zachary D. Carter is the author of The Price of Peace: Money, Democracy and the Life of John Maynard Keynes.
For the third time in a decade, the U.S. government is threatening to blow up the global financial system. There is no economic rationale for this threat, and its consummation promises no political advantage to anyone. It is a preposterous, silly and breathtakingly dangerous situation.
Fortunately, it can be resolved with a preposterous, silly and perfectly painless legal trick: minting a single platinum coin with a face value of $1 trillion or more.
The ongoing Senate debate over the federal debt ceiling embodies everything comical and grotesque about modern American political dysfunction. Unless Congress or the Treasury Department acts, the U.S. government will default on its debt by Oct. 18. Because U.S. Treasury bonds are a basic unit of international finance, a default would immediately throw global investment into chaos. Treasurys are formally deemed “risk-free” by bankers and bank regulators. They serve as an official benchmark of reliability for all other lending and investing, public or private, and are used as collateral for loans all over the world. A default would force an immediate revaluation of a wide range of matters, including money market funds and the geopolitical status of China and the European Union.
According to the number-crunchers at Moody’s, a U.S. government debt default would destroy 6 million American jobs and send the domestic unemployment rate to 9 percent. But even this valiant effort to quantify the potential damage understates the risk: It’s simply impossible to predict how major investors and other governments would respond to the shock of a previously inconceivable event. We don’t really know how severe or prolonged the damage could be.
The worst part, though, is that if there is a default, it will not be because the government can’t afford to pay its bills or failed to market its bonds. We are instead the improbable captives of a technicality established during World War I — an era when the Bank of England called the tune for the global economy and money was denominated in different weights of gold.
Until 1917, the U.S. government typically issued debt at the specific direction of Congress. A law was passed every time the government wanted to raise money from investors, a situation that proved inconvenient to the exigencies of 20th-century warfare. So Congress simplified its legislative calendar by deputizing the Treasury Department to take care of whatever borrowing might be required to meet the war spending Congress had approved. A formal limit on the amount of debt Treasury could sell was imposed to prevent bureaucrats from running wild with their new responsibilities.
So the debt ceiling was not designed to be an important instrument of economic policy: Congress retained the power to set all spending and tax terms, as it does today. But Congress also must vote every now and then to raise the limit on Treasury’s authority to borrow. Failing to do so means the government can’t meet the obligations it has already approved.
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