The $5 Trillion Coin
Gimmicks the government could use to resolve the debt-ceiling debacle.
The countdown clock to the Debtpocalypse now stands at four days, give or take. Soon, the Treasury will start receiving bills it cannot pay, and the United States will fall delinquent on billions of dollars in promised payments to Social Security recipients, government contractors, and so on. Congress remains deadlocked. So, the chattering classes have started getting creative. If you cannot lift the debt ceiling, maybe you can vault over it.
One option is coin seigniorage—aka, the "really-huge-coin workaround." The United States has a statutory limit on the amount of paper money in circulation, but no such limit on coins. The Treasury secretary has the authority to mint certain coins of any denomination, with no need for the value of the metal to equal the value of the coin. (It gets a bit technical.) But the idea is that Secretary Timothy Geithner could order the Mint to make a, say, $5 trillion coin. It could then use the coin to buy back and extinguish debt from the Fed, pushing the country back under the ceiling. Or it could deposit it, and the Fed could counteract the inflation by selling government debt.
The idea originated in the lefty blogosphere; FireDogLake writer "beowulf" wrote about this "escape hatch" or "subway tunnel" all the way back in January. Most commentators dismissed it as fanciful. But it does seem to be entirely legal, and is getting renewed attention and a wee bit of credibility as the negotiations drag on. Yale constitutional law professor Jack Balkin floated it as an option in a CNN op-ed this week.
A second workaround is for President Barack Obama to declare the debt ceiling null and order Treasury to start issuing new debt again. It is known as the constitutional option, or the 14th-Amendment option. Section 4 of that Amendment 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." The idea is that Obama could argue that the debt ceiling calls into question the "validity of the public debt," and therefore is unconstitutional.
Former President Bill Clinton backed the notion in a recent interview with Joe Conason. "I think the Constitution is clear and I think this idea that the Congress gets to vote twice on whether to pay for [expenditures] it has appropriated is crazy," he said, adding he would invoke the option "without hesitation, and force the courts to stop me."
Some Democrats in Congress have thrown their weight behind the 14th-Amendment option too. House Minority Whip Steny Hoyer told MSNBC this week: "Very frankly, if it came down to his looking default in the eye on Tuesday or taking this action, as President Clinton said, it would be better to take the action and find out later that perhaps he went beyond his authority [but] protected the creditworthiness of the United States of America." Chris Van Hollen, the ranking member on the House Budget Committee, agreed.
A third possibility is the "overdraft option," proposed by CNBC's John Carney: The Fed could just let Treasury overdraw its checking account. It would work like this. When you deposit a government check, your bank does not submit it to the Treasury for payment. It submits it to the Federal Reserve, where the Treasury keeps its current account. The Fed could allow overdrafts. Or, Chairman Ben Bernanke could sell government bonds and, as required by law, credit the Treasury with the proceeds to keep the government in the black.
All three options remain unlikely. Coin seigniorage feels like a late-night TV scam, and could raise some sticky questions about who controls the money supply and whether the country is simply monetizing its debt. The 14th-Amendment option, while promising, seems improbable given that the White House has dismissed it outright. Of the three, some version of the overdraft option seems most likely to come to pass in the event that Aug. 2 comes and goes without a deal. The Federal Reserve will undertake extraordinary measures to stabilize the economy if the Treasury enters a period of delinquency. Perhaps it will not allow the Treasury to overdraft. Perhaps it will not sell bonds to bail the Treasury out. But it will undertake other measures to prop the economy up, and some of those might have the effect of footing or financing some of the Treasury's bills.
Annie Lowrey, formerly Slate’s Moneybox columnist, is economic policy reporter for the New York Times.
Illustration by Rob Donnelly.