Paul Krugman channels WSJ's Joe Wiesenthal on the argument that the impending debt ceiling is a more dangerous situation for the world economy than the impending taper by the Fed, with Krugman also supporting Wiesenthal in arguing that using the trillion dollar coin gambit to overcome the debt ceiling if Congress does not raise the debt ceiling in time to avoid a default, http://krugman.blogs.nytimes.com/2012/08/26/the-taper-versus-the-crazy . Let me deal with the taper matter at the end of this post, but let me deal with the trillion dollar coin business first.
Now it is true that Krugman sort of ridicules the trillion dollar coin shenanigan, showing a pic of one with Dr. Evil from Austin Powers pictured on it, and many comments on his post suggesting all sorts of absurd figures to be on it. But in the end he does seem to endorse it as the way to deal with the Congressional threat to fail to raise the debt ceiling unless Obamacare is defunded or whatever blackmail they attempt to impose on Obama as a price for raising the debt ceiling. As I and others have previously pointed out, and Obama seems to understand, caving to any serious demand on this debt ceiling nonsense simply encourages more of this in the future. While Obama has been loudly declaring he will not negotiate, it is pretty obvious that he really does need some stick to wave at the Congress if they persist. In then end, Krugman agrees with Wiesenthal that having Treasury coin a trillion dollar platinum coin that gets deposited with the Fed, allowing more borrowing by the Treasury is the way to go.
Well, except there is a major problem with this. Both the Treasury and the Fed must go along with the scheme and follow through in order for it to be effectuated. Unfortunately, at the beginning of this year both bodies made it clear that neither was willing to do any of this, despite legal interpretations that suggest it can be done (initially enacted to allow minting platinum coins of vague denominations for collectors). This was reported by Ezra Klein, www.washingtonpost.com/blogs/wonkblog/wp/2013/01/12/treasury-wont-mint-a-platinum-coin-to-sidestep-the-debt-ceiling . So, maybe the Treasury can be ordered by the president to mint the coin, but he has no authority or ability to order the Fed to do anything about this if they do not want to. Maybe he could cut a deal with Yellen, but, well, even that may not work.
So, this leaves basically only one other option other than playing through a full chicken game with irresponsible Tea Party lunatics in the House: declare the debt ceiling unconstitutional based on the 14th Amendment or related arguments. However, there is this minor problem that Obama has previously declared that he does not accept the unconstitutionality of the debt ceiling, drawing on arguments from his former Harvard law prof, Laurence Tribe. But many others have argued that it is unconstitutional, including former President Bill Clinton. If the loonies take over the House, Obama will need to change his mind on this matter, since it will be nearly impossible for him to get Treasury and Fed to go along with the trillion dollar coin game, and there is no other option.
Regarding the taper, while nobody knows what will happen given that we are in a completely unprecedented situation, it is quite possible that we have already seen much of the impact of the taper. Interest rates have already jumped a point in anticipation of it, with the outcome being mostly serious problems in developing nations such as Indonesia, India, and Brazil. I did not foresee this, and I am not sure who did, so it is not like the taper is all that painless. But we may be seeing much of the pain already, with the likely outcome of actually doing it being more of this. At least for the US, Krugman and Wiesenthal may be right that defaulting on the debt would be worse than the taper, although a really sharp jump in interest rates in the US would probably be even more damaging for all those countries already suffering from those induced by the anticipation of the ending of the the QEs.
I am sorry that it seems that my links are not working here, although they worked when I typed them in separately. However, they do say what I say that they say.
Barkley Rosser
Excellent points, especially the constitutionality of the debt ceiling. Not sure if the 14th amendment is the right way to go. I'm more partial to the Article 1 Section 8 (and to a lesser part Section 7) of the US Constitution, which requires that Congress is responsible for all payments of debts, including those based on the credit of the nation. Since the debt ceiling is based on debts we've already incurred, the Tea Party folks in Congress cannot legally withhold raising the debt ceiling (i.e. payment on past debts) unless they want to violate their oaths of office, which according to Article 1 Section 6 would amount to an arrestable offense based on a treasonous act against the country (by destroying the economy for the foreseeable future, if not forevermore).
ReplyDeleteOh, and I had trouble opening the links, even when I copied-pasted them into my browser. If you can re-post them I'd like to read them. A search on Google didn't come up with anything.
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