David Zervos of Jefferies is always good for a unique take on economics, and his latest note on the debt ceiling doesn’t fail to deliver.
He starts by talking about, yes, the economics of the trillion dollar coin, but where he gets interesting is where he talks about how a US default could possibly occur.
Without a Platinum Coin the debt limit ensures that there will come a day in the not too distant future where the Treasury general account has a zero balance. What will happen with the 100b of monthly deficit spending that cannot via funded via debt issuance? The Republicans believe it will force spending cuts of 100b/mth, or at least get the Democrats to cave on entitlement reform. Maybe, but mechanically, when that account gets to a zero balance, the guy with the toughest job on the planet will be Ben.
He will have to answer the one question that haunts everyone at 20th and Constitution Ave: Will the Fed ever bounce a US Treasury check? My guess is that the answer to that is NO! While Obama will not (and probably cannot) invoke the 14th amendment to just issue Treasury debt beyond the ceiling, Ben is not so lucky. If he were to send “insufficient funds” notices to little old ladies trying to cash US Treasury benefits checks, he may very well be in violation of the 14th amendment. The Fed would be questioning the value of US public debt. The rubber meets the road on the Fed’s balance sheet and inside the Treasury general account. The trigger on any default would have to be pulled by Ben. And its a bazooka he does not want to fire!
The idea that the Fed could give the Treasury overdraft protection is one that’s been denied via reports, but when the rubber meets the road, there’s no guarantee of what will happen.
Much like the coin debate, it would at least rekindle the question of where money really comes from.
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