We should challenge the constitutionality of the debt ceiling to prevent future shenanigans and prepare a platinum coin fail-safe to assuage the financial markets.
Section4, “ Validity of public debt” in the 14th amendment states, [1]
> 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.
Numerous constitutional law experts and politicians have made the argument that the debt ceiling violates this part of the constitution as explained in that Wikipedia section. There are certainly nuances beyond my legal comprehension, including how the debt ceiling was introduced to avoid congressional authorization of individual treasuries issuances, so I can’t speculate on how this could play out.
Further, there is the more general constitutional question of what should the Executive do when Congress passes contradictory legislation. E.g., mandating spending without authorizing sufficient funds, either through taxes or debt issuance authorization. It could be argued that the Executive has discretion in resolving this contradiction, including ignoring the debt ceiling.
To safeguard against global financial meltdown in the event of a suicidal judiciary decision, we can prepare and pre-annonunce a platinum coin fallback. In the event of an injunction barring new treasuries issuance beyond the debt ceiling, then we’ll simply purchase existing government debt from the Fed using a platinum coin and then retire those treasuries, thereby putting us back under the limit. Both the Treasury and the Fed will be standing by, ready to take these actions at a moment's notice.
Thanks for explaining this - I agree that this is likely an elegant solution. Thinking as a lawyer (never a great way to start a sentence I know) may I suggest that another elegant solution is to rely on the full faith and credit clause to treat a debt ceiling breach exactly like a government shutdown.
At an extremely high level a government shutdown exists when the government runs out of statutory funding authority. Successive administrations has crafted a now standard legal regime whereby ending of statutory funding just stops non-essential government services. These have withstood scrutiny because no court would read the Antideficiency Act as mandating a catastrophe.
If the debt ceiling is breached there are very strong arguments that the full faith and credit clause prevents the government from defaulting on any debts it has incurred. However, the debt ceiling must still have some effect on new obligations so you could draw a very strong analogy to the legal reasoning behind government shutdowns and just close down non-essential work for the duration of the breach. If anything, the case for only shutting down non-essential work is stronger than with the Anti-Deficiency Act as the relation to the Full Faith and Credit clause is clearer. Similarly to with the Antideficiency Act, I very much doubt that courts would rule the debt ceiling statutory regime mandated a catastrophe.
Can anyone explain why the Dems didn’t already eliminate the debt ceiling? If the voters are uninformed enough to be unsure of who is at fault in this situation, then why would they care about 1 week’s worth of news stories about the Democrats getting rid of the debt ceiling entirely? The only thing I can figure is that Democratic leaders must believe it makes the Republicans look bad, which is true, but I doubt many elections will turn on this issue, and it just doesn’t seem worth the risk. On the substance, my two cents (ha) is that minting the coin in advance and letting the court process play out is a better approach than the interest rate method since as Matt mentions it will likely raise borrowing costs for everyone to some degree. Either way, doing either of these things well in advance of the showdown would be ideal to avoid rattling markets.
This kind of Matt-splaining of complex or difficult issues is exactly why I subscribe. I don't always agree with his conclusions, but I enjoy and respect the analysis and insights. Thanks Matt.
A crisis can be a fine thing if you sincerely want unpopular policies. Secession led to emancipation. World War Two and Nazism discredited white supremacy and led to desegregation.[1]. The Great Depression led to the doubling of federal spending. None of these policies had much support before the precipitating crisis, yet they all became consensus positions within a decade or two.
Provoking crises to get one’s way sounds like a risky ploy that only desperate and marginalized people would try. Yet American history has been exceptionally gentle-- we have emerged from every major crisis stronger than we entered it. This is really freaky-- France, Germany and Japan all endured privation during World War Two, and even Britain endured ten years of rationing and lost its empire. America is so powerful that we can squander $6 trillion in Iraq and Afghanistan without great loss of power or prestige. Republicans are more willing to provoke crises than French or German conservatives because we, unlike them, have weathered crises without catastrophe.
Still, the idea “America does well in big crises” is facile. There are too few data points to have any confidence that the next storm will pass as gently as the last. Perhaps this is why empires teeter and sometimes fail.
[1] It’s unclear whether desegregation would have occurred without the cold war. Jim Crow was antithetical to US efforts to win hearts and minds in East Asia.
My two cents as a lawyer (commercial litigator, not constitutional) is that I've thought for many years that there's a pretty clear argument under ordinary statutory interpretation principles that Congress works an implied repeal of the debt ceiling to the extent it authorizes spending that exceeds the ceiling without providing any other mechanism to pay for it (e.g., higher taxes, authorizing sale of sufficient existing government assets, authorizing printing more money, etc.). There were a series of SCOTUS decisions in the 1970s finding that Presidents were constitutionally required to spend everything that Congress directed them to spend, so implied repeal is far more plausible under existing precedent than what appears to be the present Republican theory that the President has the inherent authority to decide how to prioritize spending.
I think Matt does a great job of emphasizing how boring and stupid it is that we're still talking about this, but I want to make a point of even further emphasizing how boring and stupid it is that we're still talking about this.
I don’t think we should underestimate just how poorly a debt ceiling crisis could go. This is not a government shutdown. Instead, financial markets could go thermonuclear should the Treasury be forced to default on the safest financial asset in the world; the bedrock asset of our entire financial system. And we could trigger that meltdown even before an actual default as financial market participants position themselves for a potential default.
> And while much of the concern in the market is — just like the discussion in D.C. itself — so far mostly just talk, there are some early signs of traders prepping for the possibility of a standoff on government spending, and potentially even a default on some shorter-term US debt.
We’ll see larger perturbations in markets as we get closer to a potential default. Those dislocations will reverberate all throughout global financial markets since US treasuries are foundational to the entire financial system. That could lead to liquidity (i.e., insufficient cash) and solvency (i.e., bankruptcy) issues for numerous market participants. That is what happened in the 2008 global financial crisis and treasuries are far more important than mortgages.
Hence, even just the possibility of a debt crisis and US treasuries default could cause an unimaginably larger financial crisis.
Personally I'm still in favor of the platinum coin, because I appreciate one institution calling out another on its BS. Make a single 10g coin, say it's worth a septillion dollars. It won't affect inflation in the slightest because that money never enters circulation except to the degree Congress already approved or already had the power to approve in the future, it just changes a meaningless database entry.
“ 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.”
That pretty much ends the debate. We could have a shutdown but the debt must be paid.
I always thought they said basis point rather than percentage to more clear. You might say the bond rate increased 15 basis points (2.00 to 2.15) rather than increased by .15 percent (which could mean the same or could mean it increased from 2.00 to 2.03)
Your bond math is all off. A 10-year bond with a 27% coupon is never going to be worth $712. The total amount of cash you’re going to get over the life of the bond is $270 of interest plus $100 of principal. If you pay anything more than $370, that’s a negative yield.
The actual formula for computing yield is more complicated than what you’re using. You need to list out the cash flows, then find a discount rate that gives those cash flows a present value equal to the market price.
I've been wondering how hard rhetorically Dems will go when this crisis comes. Matt's final clause is usually phrased as "do not negotiate with terrorists", not "hostage takers". Calling the Republican fringe terrorists would be controversial but Biden already went to "semi-Fascist" and the discourse about right-wing domestic terrorism is already quite advanced.
Footnote 1 is not correct. A basis point is 1/100th of a percent. So if the treasury yield moves 15 bps it might move from 3.67% to 3.52%.
Mint. The. Coin.
We should challenge the constitutionality of the debt ceiling to prevent future shenanigans and prepare a platinum coin fail-safe to assuage the financial markets.
Section4, “ Validity of public debt” in the 14th amendment states, [1]
> 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.
Numerous constitutional law experts and politicians have made the argument that the debt ceiling violates this part of the constitution as explained in that Wikipedia section. There are certainly nuances beyond my legal comprehension, including how the debt ceiling was introduced to avoid congressional authorization of individual treasuries issuances, so I can’t speculate on how this could play out.
Further, there is the more general constitutional question of what should the Executive do when Congress passes contradictory legislation. E.g., mandating spending without authorizing sufficient funds, either through taxes or debt issuance authorization. It could be argued that the Executive has discretion in resolving this contradiction, including ignoring the debt ceiling.
To safeguard against global financial meltdown in the event of a suicidal judiciary decision, we can prepare and pre-annonunce a platinum coin fallback. In the event of an injunction barring new treasuries issuance beyond the debt ceiling, then we’ll simply purchase existing government debt from the Fed using a platinum coin and then retire those treasuries, thereby putting us back under the limit. Both the Treasury and the Fed will be standing by, ready to take these actions at a moment's notice.
[1] https://en.wikipedia.org/wiki/Fourteenth_Amendment_to_the_United_States_Constitution#Section_4:_Validity_of_public_debt
*edited to fix typo
Thanks for explaining this - I agree that this is likely an elegant solution. Thinking as a lawyer (never a great way to start a sentence I know) may I suggest that another elegant solution is to rely on the full faith and credit clause to treat a debt ceiling breach exactly like a government shutdown.
At an extremely high level a government shutdown exists when the government runs out of statutory funding authority. Successive administrations has crafted a now standard legal regime whereby ending of statutory funding just stops non-essential government services. These have withstood scrutiny because no court would read the Antideficiency Act as mandating a catastrophe.
If the debt ceiling is breached there are very strong arguments that the full faith and credit clause prevents the government from defaulting on any debts it has incurred. However, the debt ceiling must still have some effect on new obligations so you could draw a very strong analogy to the legal reasoning behind government shutdowns and just close down non-essential work for the duration of the breach. If anything, the case for only shutting down non-essential work is stronger than with the Anti-Deficiency Act as the relation to the Full Faith and Credit clause is clearer. Similarly to with the Antideficiency Act, I very much doubt that courts would rule the debt ceiling statutory regime mandated a catastrophe.
Can anyone explain why the Dems didn’t already eliminate the debt ceiling? If the voters are uninformed enough to be unsure of who is at fault in this situation, then why would they care about 1 week’s worth of news stories about the Democrats getting rid of the debt ceiling entirely? The only thing I can figure is that Democratic leaders must believe it makes the Republicans look bad, which is true, but I doubt many elections will turn on this issue, and it just doesn’t seem worth the risk. On the substance, my two cents (ha) is that minting the coin in advance and letting the court process play out is a better approach than the interest rate method since as Matt mentions it will likely raise borrowing costs for everyone to some degree. Either way, doing either of these things well in advance of the showdown would be ideal to avoid rattling markets.
This kind of Matt-splaining of complex or difficult issues is exactly why I subscribe. I don't always agree with his conclusions, but I enjoy and respect the analysis and insights. Thanks Matt.
A crisis can be a fine thing if you sincerely want unpopular policies. Secession led to emancipation. World War Two and Nazism discredited white supremacy and led to desegregation.[1]. The Great Depression led to the doubling of federal spending. None of these policies had much support before the precipitating crisis, yet they all became consensus positions within a decade or two.
Provoking crises to get one’s way sounds like a risky ploy that only desperate and marginalized people would try. Yet American history has been exceptionally gentle-- we have emerged from every major crisis stronger than we entered it. This is really freaky-- France, Germany and Japan all endured privation during World War Two, and even Britain endured ten years of rationing and lost its empire. America is so powerful that we can squander $6 trillion in Iraq and Afghanistan without great loss of power or prestige. Republicans are more willing to provoke crises than French or German conservatives because we, unlike them, have weathered crises without catastrophe.
Still, the idea “America does well in big crises” is facile. There are too few data points to have any confidence that the next storm will pass as gently as the last. Perhaps this is why empires teeter and sometimes fail.
[1] It’s unclear whether desegregation would have occurred without the cold war. Jim Crow was antithetical to US efforts to win hearts and minds in East Asia.
My two cents as a lawyer (commercial litigator, not constitutional) is that I've thought for many years that there's a pretty clear argument under ordinary statutory interpretation principles that Congress works an implied repeal of the debt ceiling to the extent it authorizes spending that exceeds the ceiling without providing any other mechanism to pay for it (e.g., higher taxes, authorizing sale of sufficient existing government assets, authorizing printing more money, etc.). There were a series of SCOTUS decisions in the 1970s finding that Presidents were constitutionally required to spend everything that Congress directed them to spend, so implied repeal is far more plausible under existing precedent than what appears to be the present Republican theory that the President has the inherent authority to decide how to prioritize spending.
I think Matt does a great job of emphasizing how boring and stupid it is that we're still talking about this, but I want to make a point of even further emphasizing how boring and stupid it is that we're still talking about this.
I don’t think we should underestimate just how poorly a debt ceiling crisis could go. This is not a government shutdown. Instead, financial markets could go thermonuclear should the Treasury be forced to default on the safest financial asset in the world; the bedrock asset of our entire financial system. And we could trigger that meltdown even before an actual default as financial market participants position themselves for a potential default.
We already see signs of this repositioning as Tracy Alloway explained yesterday in, “The Bond Market Is Already Worrying About a Debt-Ceiling Debacle”, https://www.bloomberg.com/news/articles/2023-01-10/the-bond-market-is-already-worrying-about-a-debt-ceiling-debacle
> And while much of the concern in the market is — just like the discussion in D.C. itself — so far mostly just talk, there are some early signs of traders prepping for the possibility of a standoff on government spending, and potentially even a default on some shorter-term US debt.
We’ll see larger perturbations in markets as we get closer to a potential default. Those dislocations will reverberate all throughout global financial markets since US treasuries are foundational to the entire financial system. That could lead to liquidity (i.e., insufficient cash) and solvency (i.e., bankruptcy) issues for numerous market participants. That is what happened in the 2008 global financial crisis and treasuries are far more important than mortgages.
Hence, even just the possibility of a debt crisis and US treasuries default could cause an unimaginably larger financial crisis.
Personally I'm still in favor of the platinum coin, because I appreciate one institution calling out another on its BS. Make a single 10g coin, say it's worth a septillion dollars. It won't affect inflation in the slightest because that money never enters circulation except to the degree Congress already approved or already had the power to approve in the future, it just changes a meaningless database entry.
“ 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.”
That pretty much ends the debate. We could have a shutdown but the debt must be paid.
I always thought they said basis point rather than percentage to more clear. You might say the bond rate increased 15 basis points (2.00 to 2.15) rather than increased by .15 percent (which could mean the same or could mean it increased from 2.00 to 2.03)
Here is the original Matt Levine article from 2013.
https://www.bloomberg.com/opinion/articles/2013-10-02/mint-the-premium-bonds-
Your bond math is all off. A 10-year bond with a 27% coupon is never going to be worth $712. The total amount of cash you’re going to get over the life of the bond is $270 of interest plus $100 of principal. If you pay anything more than $370, that’s a negative yield.
The actual formula for computing yield is more complicated than what you’re using. You need to list out the cash flows, then find a discount rate that gives those cash flows a present value equal to the market price.
I've been wondering how hard rhetorically Dems will go when this crisis comes. Matt's final clause is usually phrased as "do not negotiate with terrorists", not "hostage takers". Calling the Republican fringe terrorists would be controversial but Biden already went to "semi-Fascist" and the discourse about right-wing domestic terrorism is already quite advanced.