Move over, trillion dollar coingot a new one debt limit alternative in town — and this one sounds more complicated, which some proponents say might make it more likely to work.
For years, debt limit skeptics have argued that the United States could get around the limit on how much it can borrow by minting a large denomination coin, depositing it in a government account at the U.S. Treasury Department. Federal Reserve. The officials can then use the money earned to pay the country’s bills. The move would exploit an oddity in US law that gives the Treasury Secretary full discretion when it comes to minting platinum coins.
But there are always challenges to the idea: The Treasury Department has shown little interest. It is not clear whether the Fed will take the coin. It just sounds out of the ordinary to the point of absurdity. And now, some are debating a fancier-sounding alternative: premium bonds.
Governments often finance themselves by issuing debt in the form of financial securities called bonds and bills. They have a certain value after a fixed period of time—say, $1,000 for 10 years—and they pay a “coupon” twice a year in between. Typically, those bond yields are set close to market rates.
But in premium bonds The idea is that the government will renew old, soon-to-be-expired bonds with a higher bond yield. Doing so won’t technically add to the nation’s debt — if the previous government had a 10-year $1,000 bond outstanding, the government would still have a 10-year bond worth $1,000. $1,000 unpaid. But investors will pay more to hold bonds that pay $7 a year than bonds that pay $3.50, so the promise of higher interest rates will allow the Treasury to raise more money. than.
Will higher interest rates, which will cost the government more, cause problems? Not technically. Debt limit applies to face value of unpaid federal government debt ($1,000 in our example), not the promise of future interest payments.
And the idea can also have a slightly different flavor. The government can issue bonds that pay interest periodically but never pay back the principal or the bonds are perpetual. People will buy them for long-term cash flow, and they won’t add to the principal of the outstanding debt.
The premium bond idea has received backing from some big names. Economic commentator Matthew Yglesias bring it up in January, Bloomberg columnist Matt Levine written about it, and Paul Krugman, The New York Times columnist and Nobel Prize-winning economist. make a case for it this week.
But even some advocates of the premium bond admit it could face regulatory challenges or damage the U.S. reputation in the eyes of investors. Plus, designing and releasing them will have to happen quickly.
“Typically, Treasury makes changes slowly, with a lot of advice from bond market participants and information,” said Joseph E. Gagnon, an economist at the Peterson Institute for International Economics. advance notice of auctions.
However, he added, it “certainly beats default” and he “would argue that’s better than not paying workers or retirees.”
While the idea of a premium bond can come in many different ways, it has a lot in common with the idea of a coin. Either plan would exploit the loophole to replenish government coffers without actually raising the debt limit. Because both are considered ostentatious, they are unlikely to come true.
Chris Krueger, a policy analyst at TD Cowen, said of all the options the government could use to unilaterally overcome the debt ceiling, “in our view, they are less likely to happen. out the most”.
But a workaround revolves around 14th Amendment Mr. Krueger said it could garner wider support. That would advance a provision in the Constitution that says the validity of public debt should not be questioned.
Some legal scholars argue that the language exceeds the statutory borrowing limit, which currently limits the federal debt at $31.4 trillion. The idea is that the government’s responsibility to pay what they owe would override the debt limit rules – so the debt limit could be ignored.
It won’t be a perfect solution: The move would lead to an immediate challenge in court and could cause uncertainty in the bond market that even its supporters admit. receive. However, some White House officials have look at the options.
