Calling the Debt Ceiling Bluff: Taking It To The Owners

Joe Firestone has written an excellent piece at New Economic Perspectives on the phony fear mongering about the risk that the Republicans might not vote to raise the debt ceiling. He uses as his point of departure exquisitely fraudulent framing that Ezra Klein adopted for the proposal to trade a budget continuing resolution without defunding Obamacare, for taking the fight to the debt ceiling.

The reason the Republican leadership is making the case for that trade is that a continuing resolution has to pass both Chambers, and the version that defunds Obamacare is Dead On Arrival in the Senate, which will amend the bill to restore Obamacare funding and refuse to budge in reconciliation. So sooner or later, the House will have to pass a continuing resolution that includes funding for Obamacare, or else shoulder the political blame for shutting down government.

But what Joe focuses on is the framing of trading off a budget fight for a debt ceiling fight, in which Ezra says:

his is terrifying that this is the argument. And the analogy I would use is this is like trading a bad flu for septic shock. it is the worst trade in the history of all trades you could imagine . . .

Trading a bad flu for septic shock might be the worst trade in the history of all trades, but the only thing that makes the debt ceiling dangerous is the administration's refusal to call the bluff. As Joe lays out, there are not one, not two, not three, not four, but five options, and three of them would succeed in eliminating the threat that the debt ceiling vote can every again be used for political blackmail.

 
The Three Key Alternatives

What is the debt ceiling problem? Its simply that in response to misinformation and confusion about the nature of national debts, some time ago, the Congress passed and a President signed into law the debt ceiling. The debt ceiling says that the Treasury will ignore the duly enacted decisions of Congress if the result pushes one arbitrary method of calculating the federal government debt beyond an arbitrary ceiling amount.

The debt ceiling was passed as a token concession to misinformation and confusion about the meaning and consequences of federal debt, and until recently was raised automatically as required to accommodate the duly enacted decisions of Congress.

Two of the alternatives that Joe Firestone describes are more bargaining games than actual solutions to the debt ceiling problem. One is the selective default strategy: since the debt ceiling legislation does not specify how the spending cuts required to comply will be distributed, they can be distributed to stop spending on things Congress really wants. The other is a delay and hope that the real owners of the country on Wall Street and spread around the most elite country clubs of the nation, selling an option to the Fed for the purchase of Federal property, with the option bought back for a token amount once Congress sees sense.

There is no need to resort to this kind of game playing, since there are three options that call the bluff on debt ceiling hostage taking by calling the bluff of the debt ceiling itself. This is what Ezra really refused to take into account as options that the White House not only can, but should, "put onto the table" at any time.

First, sell consols. As something originally intended to be a piece of Kabuki Theater, it is not surprise that the debt ceiling legislation is written in terms of the habitual practices of the US Treasury. Therefore, the debt ceiling itself is denominated in terms of the face value of the debt on maturity.

However, as beowolf at Corrente reminds us, there is no technical need to set a maturity date on a bond. A bond can simply be an open-ended promise to pay a set interest payment per period, with no maturity date. This is called a "consol". And if the Treasury issues consols rather than bonds with a face value on maturity, then the debt ceiling does not apply to that debt

The White House should immediate order the Treasury to prepare to issue consols to meet government finance needs as mandated by duly passed Congressional authorization and appropriation, should their ability to issue dated Treasury securities be constrained.

Second, mint mega-coins. This is considerably more well known online than consols, since it was raised and advocated online during the last round of debt ceiling hostage taking. The fact is that in 1996, Congress passed a law allowing the Treasury to mint jumbo platinum coins. The denomination was not specified in the act, nor any relationship between the value of the platinum and the face value of the coin.

So simply minting 100 $100b face value coins would result in coinage that could be deposited by the Treasury with the Federal Reserve, and on deposit the Treasury Reserve account would be credited with $100b. The Treasury should also be directed to mint these coins, and to deposit them with the Fed to retire face-value debt should it be necessary to issue new face-value debt.

Why do both rather than only one? There are technical excuses that might be trotted out, but the core reason is simple: calling the bluff on the debt ceiling will generate an appeal to the Supreme Court, and there is a risk that on the first attempt, the Supreme Court may overturn perfectly legitimate government actions. After all, this Supreme Court has a pronounced right-wing bias, and it is difficult to tell what legitimate actions of government that they might disallow when there is a Democrat in the White House.

Third, defy the debt ceiling. At the same time as the above orders are issued, the Treasury should be ordered to defy the debt ceiling if it should be necessary to allow the Treasury to both disburse all funds duly authorized and appropriated by Congress and also to meet all existing debt obligations of the federal government without default.

This is, in other words, an appeal to the 14th amendment, which states, as Section 4,

Section 4. 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. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.

Under a plain reading of the Section 1 of the Constitution, Congress has the authority to appropriate funds and levy taxes, and under the 14th Amendment, the public debt of the United States may not be questioned. The argument, therefore, is that any combination of not spending duly appropriated funds or defaulting on public debt is unconstitutional, so that it is contrary to the Constitution to respect the debt ceiling and in so doing either default on debt or refuse to spend duly appropriated funds or some combination of both.

 
This Would Call The Bluff, and Here's Why

Financial markets need securities that are free of default risk to operate as their benchmark assets for various asset terms. If the US Government defaults on its debt, that deprives US dollar based financial markets of the primary default-risk-free asset denominated in dollars. It therefore hands a tremendous advantage to financial markets in Japan, Switzerland, the UK and other countries around the world.

And the people who presently own the place will not sit still for that.

Now, as I mentioned above, both the consols and the jumbo coins would be challenged by the House at least to the Supreme Court. And there's no telling whether the Supreme Court will strike down one. But if it does, there will be conversations in quiet rooms, and it will not strike down the other.

That is particularly the case if the order to defy the debt ceiling if it may be required to avoid default has already been made. Given a choice between a default on US securities and the Supreme Court upholding the defiance of the debt ceiling on the grounds of the 14th Amendment, they will clearly choose defiance of the debt ceiling, since they are, by and large, the people who hold the public debt in private hands in the US.

However, the confusions and misconceptions regarding public debt have proven quite useful to those who presently own the place, and they are better served if the kabuki theater continues. So it is to their benefit if the debt ceiling legislation itself is not allowed to be put to a test of constitutionality.

That is why one of the means of bypassing the law is almost certain to survive Supreme Court review, if not both.

The legal rationale for upholding one or both of the debt ceiling bypasses will be on the basis of their legal merits. However, when it serves the interests of those who presently own the place, it seems that legal merit can be plucked from thin air, as many argue was the case for both Citizens United and striking down pre-clearance in the Voting Rights Act. So our confidence in this course of action does not lay primarily with the what appears to be the actual legal merit, but rather with the interests of those who hold the Treasury securities in not seeing a default on the Treasury securities.

Indeed, if one of the two means of bypassing the debt ceiling is found against by the Supreme Court, it would most likely be because the owners of the place have underestimated how hard they have to push to get what they want. They are highly unlikely to make the same mistake when the second means of bypassing the debt ceiling is being brought up.

 
The Advantage Of The Truth

We've been playing this game with the debt ceiling for a long time, but its always been basically a lie and a pretense. And now the Radical Reactionaries are keen to try to take hostages, gambling with the good faith and credit of the United States to try to extract a ransom.

But this train calls that bluff. And given the iniquitous, deceitful foundation of the gamble, calling that bluff is the righteous thing to do. Calling the bluff in this way sets a train in motion headed in a different direction. This train doesn't allow the lie to win out. It doesn't allow the hostage taking to yield its ransom. This train doesn't carry those who would make these political gambles with the good faith and credit of the United States.

One really has to wonder, if the White House does not set this train in motion, where is it in fact bound?

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Comments

Great Diary!

JayRaye's picture

It's way past time that every one in the country including the media started calling out the GOP as a bunch of liars.

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I doubt the administration is being straight with themselves ...

BruceMcF's picture

... they have bought into debt mythology from the beginning ~ and too consistently for it to be just refraining from fighting on that front.

But if jumbo coins seems too out there for the White House, despite being explicitly authorized by law, surely consols are not out there. They are a quite old-fashioned public security. The British fought Napoleon on 3% Consols.

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Great diary and overview of consols, BruceMcF

priceman's picture

Surely PCS, invoking the 14th, or consols will survive the Roberts Kangaroo coup SCOTUS. Regardless, this is where the fight needs to be had in order to clear up the misconceptions about public debt, before the public's mindset is controlled anymore on this issue as that is the biggest challenge for us MMT people; the public being susceptible to deficit terrorist propaganda on deficits in general, and on the debt ceiling which should not exist in the first place.

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