A coming showdown over the federal debt ceiling has raised interest in options for avoiding a default on the debt if Congress fails to raise the debt ceiling, including the possibility of far-out options, such as the Treasury picking and choosing which debts to pay or even minting a trillion-dollar platinum coin.
Here is the current state of play. Once the Treasury hits the debt ceiling, it may no longer issue new debt to pay bills as they come due. Congress is the only body that has authority over raising the borrowing limit, which is $31.4 trillion. House Republicans have signaled that they will fight to exact concessions and use the opportunity as leverage to reduce spending and debt.
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The Treasury plans to undertake “extraordinary measures,” which involves moving around government funds, to pay incoming bills for now — but its ability to do so will run out, most likely sometime in late spring or early summer.
At that point, the government would be at risk of defaulting on its obligations, including on interest payments on the debt — an economically devastating scenario. In order to sidestep a default, a range of options have been floated over the years.
Prioritizing payments
The Treasury could attempt to prioritize payments — that is, paying some bills while allowing others to go unpaid.
Such maneuvers have been contemplated before but have always been rejected as unworkable by the Treasury.
During a standoff with Republicans in 2011, the Obama Treasury developed a contingency plan to use incoming tax revenue to keep making payments on the principal and interest on the federal debt. Other payments would be delayed until they could be paid in full as new tax payments came in. Cuts to government expenditures would grow worse each day that ticks by.
Then-Treasury Secretary Jack Lew testified in 2013 that there are so many government programs that are seen as crucial that it would be devastating to begin putting those aside just to keep the government whole. “I don’t know how you could possibly choose between Social Security and veteran’s benefits, between Medicare and food assistance,” he said.
Moody’s Analytics economist Bernard Yaros told the Washington Examiner that prioritizing is just “not a workable solution.” He pointed out that the complexity involved with doing so would be vexing.
“Technologically, I think that it’s just also very difficult for the Treasury just to sort through the blizzard of payments that are due each day and to figure out which ones get prioritized and which ones don’t,” Yaros said.
Such an effort would have to be undertaken against the backdrop of market turbulence as investors began to doubt the government and demanded higher interest rates on Treasury securities. Treasury yields, usually seen as a crucial safe asset, are connected to all other financial products.
“It just wouldn’t be tenable for any long period of time. It wouldn’t calm markets,” Yaros added.
The Treasury under Yellen has also thrown cold water on prioritization. The United States “pays all its bills on time,” said Treasury spokeswoman Lily Adams. “The only way for the government to address the debt ceiling is for Congress to raise or suspend the limit, just as they’ve done dozens of times before.”
Still, Republicans have privately been crafting a payment prioritization plan for if Congress doesn’t agree to raise the debt ceiling, the Washington Post reported this week. The plan was reportedly part of the agreements that were reached between Kevin McCarthy (R-CA) and holdout Republicans who were exacting concessions in exchange for their vote for him to be speaker of the House. Some conservatives have argued that forcing the Treasury to prioritize payments could be helpful in addressing the high federal debt.
House Republicans could also call for the Treasury to make payments to other high-priority obligations like Medicare, the military, Social Security, and benefits for veterans. The move would be immediately inflammatory and would spark condemnation because other items like Medicaid, air traffic control, and thousands of other programs might end up unprioritized.
Maya MacGuineas, president of the Committee for a Responsible Federal Budget, pointed out to the Washington Examiner that such prioritization has never been done before and that “we don’t know legally or operationally if or how it would work.”
Invoking the 14th Amendment
Another plan, although constitutionally debatable, is President Joe Biden invoking the 14th Amendment to supersede Congress.
This notion is based on a broad reading of Section 4 of the amendment, which reads, “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.”
Neil Buchanan, an economist and professor of law at the University of Florida, has argued that the amendment makes the debt limit itself unconstitutional and empowers Biden to override Congress and compel the Treasury to continue issuing government bonds.
“The debt ceiling casts doubt on the validity of the debt because what it says is that if the debt ceiling becomes binding, the country won’t be able to pay some of its obligations,” he told the Wall Street Journal during a similar 2021 fight over the debt limit.
The move would likely face scrutiny in the courts.
Former President Barack Obama faced similar questions during the 2011 debt limit standoff but said that after consultation, his lawyers were “not persuaded that that is a winning argument.”
Platinum coin
One of the more outside-of-the-box ideas is the idea of a trillion-dollar platinum coin minted for the express purpose of bypassing the debt limit.
A provision in a law intended for developing commemorative coins allows the Treasury to mint a platinum coin in any denomination. In theory, the Treasury could mint such a coin with a $1 trillion face value and simply deposit it in the Treasury’s account at the Federal Reserve. The Treasury could then draw on the funds without having to issue new debt.
In addition to being platinum, the coin at the center of the accounting maneuver would merely have to bear the words “United States of America,” “Liberty,” the year issued, “In God We Trust,” the denomination either in numerals or spelled out, and “E Pluribus Unum.”
The Treasury has rebuffed calls for a trillion-dollar coin in the past though. In 2013, during another Obama-era fight with conservatives over the debt ceiling, the Treasury Department said it doesn’t think the commemorative coin law should be used in that manner.
Yaros told the Washington Examiner that minting a platinum coin using the obscure loophole would be perceived as a “sign of desperation” and would likely still spark much angst in the financial markets.
MacGuineas said the idea of the Treasury minting a platinum coin rubs her the wrong way. “It feels like the kind of thing that a joke government would be doing,” she said.
Super premium bonds
Another option being discussed is the idea of issuing premium bonds — essentially, bypassing the debt ceiling through financial engineering.
The concept is a bit complicated, but it hinges on the fact that the debt ceiling applies only to the face value of Treasury securities issued and not to their interest rates. So the Treasury could issue bonds offering super high interest rates as a way to raise more money at the same amount of debt, allowing the Treasury to keep paying its bills despite the debt ceiling. (Read on for an explanation of the math.)
Proponents of issuing these types of bonds see it as less gimmicky than a trillion-dollar coin and a way, although not ideal, of avoiding the catastrophe of defaulting. Matt Levine of Bloomberg laid out an example of how this would work in a recent piece advocating the premium bonds if Congress doesn’t act.
If right now the Treasury issues you a one-year security, you would pay $100 upfront, and then after a year, Treasury will pay you $100 plus $4.50 in interest. In issuing the bill, the Treasury’s debt rose by just the face amount of the security, $100, and not by $104.50 because the debt limit statute only caps the principal amount and not interest.
If the amount were increased to $200, you would receive $209 at the end of the year in interest. The idea behind premium bonds is if Treasury issues a single $100 bond with a 109% interest rate, people would be willing to pay $200 for that $100 bond. So in short, the Treasury would get $200 in cash but would only incur $100 in debt because the debt limit statute caps just the principal amount.
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Still, despite all of the unique and out-side-of-the-box ideas to mitigate default, the overwhelming majority of economists would argue that the only real solution to fixing the debt ceiling mess is for Congress to simply raise the limit once more. The consequences of failing to do so are just too profound, they argue. MacGuineas said the debt ceiling should be lifted as soon as possible.
“I hope we can do this in a way that is both productive, where we get something done in terms of improving the fiscal health of the country, but without question, it should be drama-free, and anybody who is uttering the word ‘default’ shouldn’t be helping to run the government,” she said.
