Biden's Strategy for Circumventing the Debt Limit
by John Lawrence
One suggested method is to have the Treasury mint a trillion dollar platinum coin. This is interesting because, although by law the Federal Reserve can only issue paper money, the Treasury by law can mint coins. There is no limit on the value of these coins. This is not a strategy that Biden will use because it is too obviously gimmicky. But there are more arcane strategies that will fill the bill, accomplish the goal, keep the US economy humming and not be that understandable by the general public, and, therefore, harder for Republicans to characterize and demonize. So the next strategy is for the Treasury to issue so-called 'consul' bonds. These bonds bear interest, but have no maturity date, and so raise money without adding to the debt. But there is a better way. The Treasury can buy back bonds that have a low interest rate due to the fact that they were issued before interest rates were raised, and also are worth less because of the fact that currently issued bonds have a higher interest rate. Then the Treasury Department can issue new bonds with the same monetary value as the ones retired raising the debt back to where it was before but not increasing it. The difference in value between the bonds bought back and the bonds sold would generate cash while keeping the overall national debt the same. In other words it wouldn't increase or decrease the national debt. There are other tricks which would involve the Federal Reserve which buys and sells Treasury bonds all the time, but this would be tricky because the Federal Reserve is supposed to be independent of the Treasury Department.
The beauty of having the Treasury Department buy and sell bonds generating cash to pay the government's bills is that it would be hard for Republicans to characterize and demonize. It would be hard for the public to understand what's going on although bills would be getting paid despite the debt limit and Biden can take credit for this. Meanwhile, Kevin McCarthy and his MAGA Republicans will have egg all over their respective faces. Their whole campaign to intimidate and castigate Biden will have come to naught. They will be left twisting in the wind saying, "What tha ...". Marjorie Taylor-Green will hardly understand what hit her. All the debt ceiling negotiations now going on can be seen as just a lot of posturing until they totally fail and yet the economy will keep on humming because the government's bills will still be getting paid via Biden's invoking of the 14th Amendment and manipulations being done in the bond market by the Treasury Department. Janet Yellin dost protest too loudly, methinks, that there will be no unorthodox methods used to circumvent the debt limit. This is just what Biden, cool as a cucumber, wants Republicans to believe. It doesn't mean that Biden and Yellin won't cooperate to keep the government humming once negotiations about the debt limit fail totally and completely. Biden will be the hero of the day when he gets on television and announces that he is invoking the 14th Amendment. He doesn't have to say just how this is going to be accomplished..
In a brilliant column by Paul Krugman, entitled, Wonking Out: In Defense of Debt Gimmicks, in the New York Times, May 7, 2023, he writes:
In such a situation, it’s natural to consider possible end runs around the debt ceiling that the Biden administration could use to meet U.S. commitments without the cooperation of Congress. Indeed, it would be irresponsible not to consider these possibilities. It would be especially irresponsible to reject them because they sound undignified: Crashing the world economy for fear of looking silly would be unforgivable.
There are two main gimmicks that have been widely discussed: premium bonds and platinum coins. Premium bonds are harder to explain, which may make them a more likely route, simply because the platinum coin offers an easier target for false narratives.
The U.S. government finances itself largely by selling notes and bonds (10 years or less of maturity is a note, more than that a bond). These securities combine a par value — the amount that will be paid when the note or bond matures — with an interest coupon, a sum paid twice a year. Notes and bonds are auctioned off, often for more than their par value, because sometimes market interest rates are lower than the face interest rate — the annual coupon as a percentage of par value — so investors are willing to pay a premium.
Normally this is a small factor, because interest rates on newly issued notes are set close to prevailing market rates. But that doesn’t have to be the case.
So when a $100 10-year note matures, why not issue a new note, also with a par value of $100 — so that officially we aren’t adding to the debt — but with a face interest rate of, say, 10 percent, far above market rates (which are currently 3.37 percent). This new note would sell for much more than its face value, so Treasury would in fact be raising a substantial amount of money, even though it isn’t officially increasing the debt.
And there’s nothing fundamentally wrong with selling debt instruments for more than their par value. Until 2015 part of Britain’s debt consisted of consols, bonds that pay a fixed coupon every year but never mature and therefore have no par value at all.
So there you have it folks. Using some financial legerdemain, the government can continue to function and pay its bills despite the debt limit. This makes the debt limit irrelevant and something that can hopefully be retired to its grave at some point. After all, if the Federal Reserve can use quantitative easing to create money out of thin air, so ought the Treasury Department be able to get creative by wheeling and dealing in the bond market to accomplish its goal which is to pay the government's bills in a timely manner without being held hostage by the Republican party
