1) Declare the debt ceiling unconstitutional and keep on borrowing. Bruce Bartlett, Bill Clnton, and I support this one, based on Section 4 of the 14th Amendment. If it held, as it would be challenged in the courts, it would effectivly abolish this uniquely idiotic device. OTOH, aside from serious people like Laurence Tribe who say the debt ceiling is constitutional, Obama would certainly face impeachment by the House, if not removal by the Senate, and the financial markets might demand higher interest rates on US securities due to the uncertain legal foundation of any new borrowings. While his press secretary has supposedly ruled this out, Obama himself has never specifcally commented on this issue, indeed, has refused to do so. Non-trivial possibility he might follow this one, if he has the chutzpah.
2) The full haircut. Under the constitution the president (and the treasury secretary acting on his behalf) does not have the right to decide to pay some bills and not others (although this has been done in the past during hilariously labeled "government shutdowns"). So, to avoid violating this law, he simply cuts all spending across the board by the necessary amount to immediately balance the budget, everything. This would mean a technical default as interest payments on the debt would not be made. This has serious legality, but very unlikely.
3) Partial haircut. Avoid technical default by paying interest and principal on coming due debt, but cut other spending. This has many variations from applying (2) but not to the debt itself or also preserving some other categories not to cut, with pensions for veterans having perhaps the strongest constitutional argument for being preserved based on the specific language in Section 4 of Amendment 14 that speaks of pensions for Union soldiers in addition to the national debt as being inviolate. Some variatoin on this may be his most likely choice, legally problematic as it would be.
4) Mint high-value platinum coins. I have posted here on this idea of beowulf's, legal under a 1997 law. So, US Treasury mints trillion dollar platinum coin and deposits it with the NY Fed, continues to pay bills without having to borrow. This is indeed legal and would avoid a constitutional crisis, but would kick the can down the road on the broader debt ceiling and deficit issues, and would also probably be ridiculed and poorly received by the financial markets.
5) Have the Fed forgive portions of US debt it holds. This would allow for borrowing without breaching the debt ceiling, and is probably legal. However, no other central bank has ever done such a thing, as near as I can discern from some googling (although some have forgiven interest payments on debt), and would also be received poorly by financial markets. Also, House in particular would probably go after the Fed big time, led by Ron Paul. Indeed, I suspect that if Ben Bernanke and Tim Geithner were to discuss this, Ben would say to Tim, "you mint that coin."
I shall make one final note on the debt ceiling itself. Many are loudly declaring that it has always been there to "discipline" the budgetmakers, even though the budgetmakers are Congress itself and should tie the debt ceiling to their making of a budget, as I recommended in my most recent post here. However, back in 1917 when the ceiling was first adopted, it was done so as a mechanism to allow for flexibility on the part of the Treasury in connection with financing for WW I. Previously, in following the explicit mandates in the Constitution, Congress had always specifically approved (or disapproved) every specific act of borrowing money by the US government, much in the way one sees at state and local government levels. But the debt ceiling was put in place to allow the Treasury to engage in borrowing on its own, although within the limits set by the debt ceiling, very far from the current interpretations by so many people, including a lot of idiots in Washington who, as Paul Krugman describes them, claim to be Very Serious People.
The best option is a variant of (1) which does not require issuing new bonds: simply make all payments as they come due and accumulate an overdraft at the Fed as Treasury checks clear. This will have the least serious economic effects, since Treasury yields will not rise and there will be no forced fiscal contraction. But there will be political costs as discussed in my post on the issue:
ReplyDeletehttp://rajivsethi.blogspot.com/2011/07/some-thoughts-on-unthinkable.html
At some point, one has to set these political costs aside and start acting on principle. If the debt ceiling cannot be raised unconditionally or repealed altogether, it has to be ignored.
Your proposition 5 seems a little off the mark in that Ron Paul was the first individual to suggest this "debt forgiveness" deal.
ReplyDeletehttp://www.tnr.com/article/politics/91224/ron-paul-debt-ceiling-federal-reserve
I wrote many articles about how QE was reducing the actual debt owed by the Treasury because all the remuneration to those FED assets (minus a 6% profit to "paid in capital" of the Federal Reserve Banks -- not to be confused with a percentage of the QE amounts) is transfered to Treasury. As such, the actual debt of the treasury is less than 14.x trillion bucks. By burning the treasuries in a furnace, the FED would simply be making the legal definition and the actual accounting definition compatible.
Your proposition 4 (coins) is a way to make the FED execute proposition 5. The Treasury essentially uses the coin(s) to repurchase the treasury notes from the FED.
ReplyDeleteIf the Treasury can do it once then the treasury can do it again and again and every stinking time the congress refuses to be accountable for its spending. The net result would probably be a joint resolution of the congress to do away with the Treasury's seigniorage authority in exchange for the repeal of the debt limit law. At present (due to the coin seigniorage) the president has all the money and credit he might need to spend in pursuit of appropriations -- AS IT SHOULD BE! If congress doesn't want the spending then the congress mustn't appropriate the funds, debt limit law be damned.
The fact that treasuries on the books of the FED are not a true liability of the US Treasury and thence future or current taxpayers implies that almost no taxation is ever necessary. In the quantitative easing world the treasury sells the debt instruments to the public and the FED buys them. The T-Bill dealers and Scrouge McDuck stay rich and that is the Republican version of capitalism. The debt limit law as written stops this from happening.
ReplyDeleteIt will be interesting to see what the FED and the gangsters in the House do as the economy slides back into recession. We know that the gangsters and the moonbats will both blame Obama and that is the politics. But what actions will the House of Nutters take to improve the situation? Having proved that THEY run the nation, and having gotten very serious cuts in spending and no tax increases, what will they do to avert their own destruction due to their incompetence and/or their assault on the nation? As the mythical "confidence fairy" should be dancing and happy at this point, the question should arise as to why the economy isn't improving. The answer from the nutters will be that the cuts were not deep enough. But not even the dumbest Bubba that ever lived could buy into that. Those with functioning brains will conclude that more progressive taxation and more spending are the cure. How MMT plays into this remains to be seen.
Trucker:
ReplyDeleteWhen you say that the Treasury sells the debt instruments to the public and the Fed buys them seems to be contradicted by Sandy Leeds. He is a finance professor at the University of Texas, and in his July 31st article entitled "I Must be Getting Old," he writes:
1.The Fed cannot buy debt directly from the Treasury. The Fed can only buy debt that has already been issued. As a result, there is no way for the Fed to circimvent Congress."
"St. Louis Fed President James Bullard said on Friday:
1. "The Fed by law cannot buy debt directly from the Treasury.
2. The Treasury must float the debt in the primary market first, and at that point the Fed can conduct open market operations.
3. Hitting the debt ceiling means the Treasury cannot float debt in the primary market.
4. Therefore, the notion sometimes floated in financial markets that the Fed can simply step in if necessary is incorrect.
5. The Fed has no options should the debt ceiling not be raised.
6. This is as it should be, because otherwise the central bank would be thwarting the will of the Congress.
7. The Chairman has emphasized this point.
8. Should a general crisis ensue, the Fed can of course provide liquidity to markets as it did in 2008 and 2009. But that is not a substitute for the Treasury raising funds by issuing paper."
www.leedsonfinance.com
Don Levit
Don,
ReplyDeleteYou are correct in this. The Fed does its open market ops, which include the purchasing of Treasury securites (and more often, repos of them), in the open secondary market through a set of specially selected brokers. However, the fifth option involved the Fed unilaterally forgiving debt that it holds, which has not been done and whose legality is questionable, but not definitely so. However, I do not think that is in the cards, the least likely of the five options, if for no other reasons than that the Fed would massively resist doing it.
Don,
ReplyDeleteAs usual, you are full of crap. I _NEVER_ claimed that the FED was buying T-bills from Treasury. I said "In the quantitative easing world the treasury sells the debt instruments to the public and the FED buys them". I would think that adding "from the public" at the end of that sentence would be superfluous. Apparently not.
I also wrote "The debt limit law as written stops this from happening." That was not an exercise in keyboarding. The fact is that although the FED's balance sheet is _NOT_ a liability to the Treasury (in that the accounting profits from those holdings are transferred to the treasury), these T-Bills are still accounted in the 14.x trillion as though these WERE obligations of the treasury just like the treasuries in the SS trust fund. It's crap.
Trucker:
ReplyDeleteI am trying to understand why the Fed's balance sheet is not a liability to the Treasury.
If the Fed buys a Treasury, doesn't the purchase price have to come from the assets of the Fed?
If so, maybe it's not a liability, but an expense.
Whatever you call it, it is a cost to the Fed to buy Treasuries, correct?
If not, how might the government show this in accounting format, so I can better understand the workings of this process.
Don Levit
Trucker:
ReplyDeleteWhat I meant to say is why isn't the Fed purchase of Treasuries a liability to the Fed (not the Treasury)?
What would be an example of a Fed liability?
Don Levit
Don,
ReplyDeleteA Fed purchase of a Treasury is an asset of the Fed and a liability of the Treasury. It used to be that this was all the Fed had on its balance sheet, but when the crisis hit in Sept. 2008, the Fed tripled the size of its balance sheet, mostly with new instruments created by its new lending agencies, as well as about $600 billion of eurojunk to save the euro and the ECB, which was rolled off pretty quickly, largely replaced by a bunch of Fannie/Freddie mortgage backed securities.
On the treastury forebearance idea Ron Paul has actually suggested the idea
ReplyDeleteBarkley Rosser,
ReplyDeleteThe purchase of a Treasury from the public by the FED is currently accounted as reducing the "debt owed to the public" and increasing the "intergovernmental debt". This is bogus accounting.
1. The money needed to purchase the Treasuries is pixie dust money that after the purchase will trade on par with all the other money in the economy. There were _NO_ government appropriations to cover the purchase and the taxpayers do not owe the money.
2. All of the profits of the FED minus the actual expenses of the FED + a 6% return to the FED banks (that is 6% of paid in capital or stock owned by the FED banks stockholders and _NOT_ 6% of the amount of assets on the books of the FED that were purchase with pixie dust money) are forwarded to the US Treasury.
Therefore: When a bond is matured, the Treasury pays the FED and the FED refunds the money. That is so because the money is PURE profit.
FED decisions are based on stability of the currency and not on FED profitability. As the FED can create money at will there is no reason for it to have a profit motive. Stability is not just on the fear of inflation side. The FED also has an obligation to adjust monetary policy so as to mitigate unemployment. There was a congress that realized that the "labor theory of value" was much applicable to monetary control. When labor gets too cheap as measured in dollars then the FED _MUST_ loosen if it is true to its charter. The "zero bound" says the FED must use Quantitative Easing. The Debt Limit law is a way to crush labor and reward the rich.
Trucker,
ReplyDeleteI believe the part where your argument has a hole is that the Fed does not refund money to the Treasury when the Treasury pays off a matured Treasury security that the Fed holds. As it is, there is an important difference between securities held by the public and those held by the Fed, even if the accounting claims this is "intergovernmental debt," a murky business given the semi-official private status of the Fed. The securities held by the Fed are part of the monetary base that can support expansion of the money supply. That is what open market ops are all about, expanding the money supply by buying the securities, and contracting it by selling them.
BTW, to one and all, this might be worth another post, but Mitch McConnell has now said that what we have just gone through is the "new normal," so my five options remain on the table for whomever will be prez in early 2013 when this stuff comes up again. This debt ceiling beast really needs to be done in once and for all. Constitutional option!
Barkley and Trucker:
ReplyDeleteThanks for your replies.
It does seem the Fed has got a bit complicated since all the new purchases.
I am sure that accounting must be a hoot.
I can now see that when the Fed buys a Treasury it is an asset of the Fed and a liability of the Treasury. By virtue of the increasing Treasury liability, I can see how this increases intragovernmental debt, assuming the Fed is an "agency" of the federal government.
The only way I can visualize the accounting would be similar to the Treasury borrowing from the SS trust fund, creating an asset for the trust fund and a liability for the treasury.
When that occurs, however, it has no impact on debt held by the public.
Only when the trust fund is tapped, does debt held by the public increase (assuming there is a deficit).
I am having a hard time understanding why when the Fed purchases a Treasury, this reduces the debt owed to the public, other than to have a corresponding number matching the increase in intragovernmental debt.
If I am getting too technical for a reply, I certainly will understand.
Don Levit
Barkley and Don,
ReplyDeleteBarkley said: "I believe the part where your argument has a hole is that the Fed does not refund money to the Treasury when the Treasury pays off a matured Treasury security that the Fed holds".
Although that is a factual statement as written, the reality turns out to be very different. As I have said and as Dean Baker has said, the profits of the FED (less the fee discussed above that goes to the reserve banks) are forwarded to the US Treasury. As the notes and bonds were COST FREE (bought with pixie dust), the profit is the whole redemption price of the notes. The treasury pays the redemption fee and the FED returns almost that much as FED profits. The Federal Reserve is NOT a private institution in the profit seeking sense. If the Federal Reserve or the Federal Reserve banks get to buy the assets with pixie dust and then collect cash from the taxpayers via the US treasury then the American people are being ripped off big time. That ISN'T how it works.
For Don: The SS trust fund is built on bonds that were purchased by wage earners FICA taxes as opposed to being purchased with pixie dust. The wage earners _OWN_ the bonds and the FED nor the treasury nor the money fairy own them. Those bonds are collateral against the loans to the treasury from the FICA tax payers and when the bonds are matured then the fund grows or the money is disbursed to the SS beneficiaries. The SS trust does _NOT_ refund its profits to the US Treasury. The flow of funds from SS to Treasury is LOANS. The flow of funds from treasury to SS is REPAYMENTS of the loans.
The treasuries held on the books of the FED are _NOT_ a taxpayer obligation because the money fairy is not a viable accounting entity anticipating payment.
To whom does the US government owe money? Answer: Mostly to itself, its people and its institutions.
ReplyDeletehttp://politicalcalculations.blogspot.com/2011/01/who-owns-us-national-debt.html
How can the US government pay its bills? Answer: By printing money.
What will happen if the US prints its own money?
Answer:
The value of the US dollar declines relative to other currencies, interest rates on treasuries can give a negative real return to 'investors'.
What are the possible positive outcomes from the US printing money?
Answer:
The fall in the value of the US dollar can make American exports more competitive with those of other nations.
+
Negative real interest rates for bondholders may result in greater income equality within the nation. As the rich are usually the creditors.
+
The mere act of 'Investing' in financial instruments does not assist in the formation of badly-needed infrastructure for the near term, in any case.
The negative consequences of the US printing money are:
- more inflation around the world (the US dollar still representing the world's reserve currency). This is a much bigger issue in poor nations if food and energy prices are significantly affected.
This problem could be offset by more assistance to those nations and peoples.
..... etc
Trucker wrote:
ReplyDeleteAs the notes and bonds were cost free
(bought with pixie dust)the profit is the whole redemption price of the notes.
I understand what you are saying here.
What I am wondering is how the Fed accounts for pixie dust on its balance sheet?
I am being serious here, Trucker. Do you have any links to the Fed that actually describes the substance of this pixie dust, from whence or where it comes?
Trucker wrote:
Those bonds (in the SS trust fund)are collateral to the loans against the Treasury.
That is correct, the asset is for the trust fund and the liability is to the Treasury.
The taxpayers are not in this loop at all - it is strictly an arm's length agreement between 2 government agencies: the Treasury and the SS trust fund.
Trucker wrote:
When the bonds are matured, then the fund grows or the money is distributed to the SS beneficiaries.
Actually, when the principal and interest mature has no direct impact on the accounting for the SS trust fund.
When the outgo exceeds the income of the SS trust fund, excluding interest, that portion of interest "matures," is redeemed.
This has occurred since 2008.
When that happens, debt held by the public rises and intragovernmental debt falls, so total debt remains the same.
Don Levit
Don asked "how the Fed accounts for pixie dust on its balance sheet?"
ReplyDeleteThe people that owned the treasuries have their bank accounts marked up and the balance sheet of the FED is also "marked up" to reflect the _value_ of the treasuries now "owned" by the FED. There was a Republican congressman that intoned that the FED was borrowing the money to do QE2 from the big banks. The FED creates money and such "borrowing" would be like the oceans needing to borrow water.
Brenda...
ReplyDeleteI liked your comment. It is pretty much the way of it.
Something feels awfully phoney about the US debt calculations. Consider the nature of the American trade deficit, for instance. A number big questions emerge:
ReplyDelete(i) what is trade when, for instance, 80% of 'trade' between Japan and the US is 'intracorporate'. Can you say that such transfers are truly commercial? How is 'trade' involved in goods simply move from one branch of the same corporation to another?
(ii) What is a 'trade deficit' when it is the US' own corporations tallied up as 'foreigner's in the nation's trade stats?
(iii) Can you call the 'yen carry trade' a 'trade' at all? Does it produce a 'good' or a 'service'? Is this sort of baloney money manipulation reflected in the 'trade deficit'?
(iv) To whom is the US Government beholden to, to pay interest on the US trade deficit?
Trucker:
ReplyDeleteThanks for your reply.
The Fed no longer owns the Treasuries, right?
They sold them in the open market.
If so, how can the Fed's assets increase?
On the other side of the ledger, debt held by the public increases, due to the Treasuries being issued. That I understand.
It's almost like we have one too many credits without corresponding debits.
Is the Fed accounting "endorsed" by any auditor, such as the FASAB?
Don Levit
Brenda:
ReplyDeleteI want to second Trucker's comment about you.
You are able to take an action, and extend it out long-term, to conceive of the potential results.
You also seem to have a sincere compassion for people, desiring that the rules of the game provide more room for people's unique gifts, talents, and abilities.
Don Levit
Thankyou for your kind words, Trucker and Don. Quite unexpected. This is when I get lost for words ;-)
ReplyDelete