Why the $ 1 trillion platinum coin won’t solve the US debt ceiling – Quartz
This article has been corrected.
Given the absurdity, it can feel like the only way out is more absurd.
The U.S. national debt limit as set today is pretty absurd: while Congress separately approves and applies an annual budget that is going into the red, it also threatens to stop paying American bills, which is the U.S. economy possibly into a recession and into the financial crisis could plunge system into crisis. It’s the equivalent of a wealthy person living beyond their means and trying to get back into the black by simply refusing to pay their mortgage, car loan, and credit card bills to cut their expenses rather than cut them, to refinance or sell the house.
As in the summer of 2011, fiscal negotiations in the next two months are likely to be marked by a daring breach of the debt ceiling, even though President Obama has promised not to negotiate with Congress about lifting the ceiling.
Then, as now, lawmakers and finance stumbled upon a way for Obama to back up that promise: With a law allowing the Treasury Secretary to mint commemorative coins, the executive could deposit a $ 1 trillion platinum coin into it to get cash from the Fed and keep paying the bills while negotiating some sort of deal with Congress if there is no further economic disaster.
Writers such as Bloomberg’s Josh Barro, Business Insider’s Joe Weisenthal, and Economist’s Ryan Avent, appalled at the potential cost of this madness, have persuasively argued that the platinum coin gambit would be an effective way for President Obama to resolve the debt ceiling debate . Proponents point out that it probably wouldn’t cause inflation, that it could be the basis for a deal that rules out both options, and that the resulting constitutional crisis would be far better off than global economic collapse.
Are only these arguments missing? All evidence that the people who have the power to mint the coin are ready to do so.
President Obama, Treasury Secretary Tim Geithner and administrative attorneys have all said repeatedly that the president will not resort to constitutional or legal loopholes to circumvent the debt ceiling. During the 2011 confrontation, when the US arrived within days of a possible default, the government did not threaten to (literally) monetize its own debt, and it is not clear why it is in a worse position now. It had a plan, even if it was dubious; it has one now.
Obama is hardly known for direct confrontation or drastic political steps in areas of legal uncertainty. Urged by many economists to go further in wiping out insolvent banks in 2009, the government pursued a much slower and arguably less effective policy of regulatory leniency and gradual recapitalization. In the face of a revolt over the inclusion of public insurance in health care reform, the government declined to move the measure forward. Housing advocates spent years urging the Treasury Department to use its financial rescue agency to assist homeowners, to no avail. It took years for the Obama administration to exploit a legal gray area to place candidates for official office after they were blocked by the Senate.
Why then should the government adopt this plan, which, regardless of its merits, sounds unprecedented and at first sight ridiculous? The plausible answer is that it is preferable to economic disaster. But let’s say at the eleventh hour the government decides, without agreement, to return to its previous positions and find a loophole to stop the crisis – will Obama become a magic coin then?
Probably not. If the Obama administration takes advantage of a loophole, it will be the simplest there is. While there is no real legal consensus on these untested tactics, it is likely that the constitutional scholar President the 14th Obama could choose to ignore the debt ceiling and continue to issue new debt. As constitutional scholar Jack Balkin explained in the last debt ceiling debate, such a move carries market risks, a by no means certain legal conflict (although it will be hard to rise to a challenge) and an angry Congress seeking impeachment, but it does is easier to explain to people. We know the finance minister tried before and then sent it back.
The Obama administration could also begin paying its obligations in promissory notes that worked for California during the recent credit crunch. It might seek an option to buy public land on deposit with the Federal Reserve for cash. It could try to outlast the Republicans by cutting government spending on powerful interests like the health sector, defense companies and retirees, and creating a natural lobby for raising the debt ceiling. The most likely outcome is similar to 2011: the two parties will agree on further fiscal consolidation, including spending cuts, and will push further decisions on tax and social security reforms later this year.
Those who fear President Obama has no leverage in negotiations may overestimate Republicans’ willingness to take the blame for a default, financial crisis, austerity-fueled recession, or a combination of both.
Correction (1/7/13): An earlier version of this article incorrectly quoted journalist Josh Barro’s sales outlet; it’s Bloomberg, not Reuters.