Of course we know that it is a crisis not in a sense that the Federal Government is unable to honour all its obligations, a point which I have been making repeatedly. It is a political game of chicken, the result of which can threaten global economic growth.
Debt ceiling itself is something rather pointless. It has never been able to constraint government spending, and the Congress has been raising it routinely, at least until now. Yet it gives opportunities for some pointless political posturing every time when the borrowing limit is reached. As Calculated Risk puts it:
The debt ceiling is a joke. It serves no purpose except political posturing. It is not about the deficit – it is about paying the bills, and the U.S. will pay the bills.
A similar point has been made by James Surowiecki at the New Yorker:
The truth is that the United States doesn’t need, and shouldn’t have, a debt ceiling. Every other democratic country, with the exception of Denmark, does fine without one. There’s no debt limit in the Constitution. And, if Congress really wants to hold down government debt, it already has a way to do so that doesn’t risk economic chaos—namely, the annual budgeting process.
Now, there are ways around the debt ceiling which may or may not have been considered by the Obama Administration, as explained by Yves Smith.
Here are the three ways around:
- Use the 14th amendment of the constitution to declare (or threaten to declare) debt ceiling as unconstitutional – but it seems that the administration is reluctant to use this.
- Cancel the US government debts held by the Federal Reserve – the government can probably cancel a trillion or two of debts, large chunk of them purchased during the quantitative easing programme. This can buy a year or two, perhaps.
- Coin Seigniorage – this requires a little bit more explanation.
The third option, as explained in great detail here, uses the fact that the US Mint can create a platinum coin of any arbitrary face value. The profit from seigniorage (i.e. the face value of this coin minus the cost of making this coin) can somehow go into the Treasury General Account. The Mint can, for instance, mint a few US$1 Trillion platinum coins, book the seigniorage profit at the Federal Reserve Mint’s account, then “sweep” that to the Treasury General Account, magically solving all deficits problems.
It is not quite so clear to me if these are politically viable options, and it is also not quite so clear to me if any of these can be useful tactics on the negotiation table for President Obama to get his way. But at least there are ways around this joke.
This article originally appeared here: 3 Ways Around The Debt Ceiling
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