Nightly Nuance - October 6, 2021

Hello, my friends. Today, I want to talk about the debt ceiling and the idea of minting a trillion dollar coin. Because this is complicated, I'm just going to give you allllll my notes today. Hope it's helpful! -b

What’s going on with the debt ceiling crisis?

From NY Mag: “Congressional Republicans are on the brink of throwing the US economy into a brutal recession, triggering a global financial panic, and vandalizing the foundations of American geopolitical power — all for the sake of gaining fodder for disingenuous midterm attack ads. Congressional Democrats, meanwhile, are on the brink of doing the very same things, just to preempt those 30-second spots (and thus force Republicans to hit them with slightly different disingenuous ads). This may sound like the synopsis of some tedious, Aaron Sorkin - helmed political satire. But it’s a straightforward description of the debt-ceiling standoff in Washington, DC today.”

How does our debt work today?

First, let’s just think about how the United States of America, as a country, spends money. Congress has to pass laws that authorize the government getting money (through taxes) and spending it. Congress also has to vote on whether to allow the Treasury to borrow funds needed to cover the gap between revenue and spending. That’s not a constitutional requirement. It’s one that Congress wrote into our law — Congress set a limit by statute on how much debt the government can hold, and so Congress has to raise the debt ceiling whenever the spending that it, Congress, authorized, exceeds this limit. This originated from convenience. Previously, Congress had to vote every time the government needed to issue debt. In 1917, Congress passed a debt ceiling to make it easier for Treasury to issue debt without getting Congress’s permission. Setting some limitation on that power is supposed to preserve the power of the purse stays with Congress instead of shifting to the Treasury Department. Since 1960, Congress has voted to raise the debt ceiling 80 times. Let’s think about what it means for the US government to borrow money. It doesn’t take out a loan the way that you or I might. It issues debt — meaning, it sells paper. This paper can take lots of forms — bills, bonds, notes — but it all amounts to an IOU from the United States government. And people buy that paper from the Government because an IOU from the US government to pay back an amount of money with interest is seen as the safest, most stable investment in the world. The US Bureau of Fiscal Service keeps records of who bought this paper and handles paying people back on the appropriate schedule. If the government can’t keep issuing debt in order to bring in the cash it needs to operate normally — including making scheduled payments on those IOUs, which is what we mean by “default”, a whole bunch of bad things could happen: The payments the government normally makes to citizens could stop. Think social security, the child tax credit, payments to military members and veterans and postal workers and federal employees The government’s credit could be downgraded, which would probably cause interest rates to go up, which would make it more expensive for everyone else to borrow money. If the risk of holding IOUs from the US government has gone up, the risk of holding IOUs from anyone else would probably go up, too. It might also mean that everyone has trouble borrowing money for a while — Wall Street’s trading systems aren’t really set up to sort out US treasuries that the government has defaulted on from those it hasn’t, so all of the buying and selling that happens of those securities could come to a halt, which could bring a lot of other lending to a halt. It helps me to think about this a little bit like the supply chain — when one piece shifts, everything around it shifts, too—to different degrees. Confidence would probably fall, which could result in problems in the stock market, which hurts 401ks and other investments. It’s important to remember that a lot of US debt is held by American citizens. I grew up hearing about the national debt as like a loan that China gave us and the conversation always sounded like China could come repossess our country like a car. That’s not how it works. The majority of US debt is held by, wait for it, the Social Security Trust fund. AKA our retirement funds, AKA taxpayers. Remember how we talked about accounting games with social security meaning that the cash we pay in doesn’t get paid out directly? Mmhmmm. And there are other government agencies who have borrowed money from each other and hold onto government-backed securities. Of the debt held outside the US government, foreign governments own only 1/3 of it. The rest is US banks and investors, the Federal Reserve, state and local governments, mutual funds, pension funds, insurance companies, and savings bonds. Of the 28.4 ish trillion dollars of debt issued right now, China only owns 1.06 trillion. That’s not nothing, but it’s not the nightmare scenario that I grew up hearing about. Japan actually owns more of our debt than China. The government could stop funding FEMA and public health initiatives around Covid 19 and programs that provide food for kids. As with all things that involve economics, we really don’t know what will happen because it all ultimately depends on human behavior, but people who study these things tend to agree with the New York Magazine description I read at the beginning — that this would be very, very bad and worse than a government shutdown.

When do we hit the debt ceiling?

Technically, we already did on August 1, but the Treasury has done some accounting wizardry to keep going. Janet Yellen is saying, “we’re going to be all out of ideas by October 18.” Right now, the federal debt is around 28.43 trillion. The current debt ceiling is 28.4 trillion. That is so much money, right? And often countries racking up debt will see people lose their faith in the countries. That’s what all money is about — am I confident that something backs this up? Do I believe you will repay your IOU with the interest you’re promising? Even though the US just keeps accumulating debt, we’re seeing our cost to borrow money falling. Investors still believe in the US economy and our country’s ability to make its interest payments. Raising the debt ceiling does not allow the government to spend more money. It is entirely about paying for programs and obligations that have already been committed to.

So…what is the problem?

Democrats can’t raise the debt ceiling through ordinary legislation, because Republicans are filibustering it. Why? Just because. Just because. Because they don’t want to be associated with raising the debt ceiling, because they want to cut ads against Democrats for spending money and they are counting on the public not to understand what the debt ceiling means. I wish there were something I could say here that sounds less cynical, but…they are saying all of the quiet parts out loud and betting that everyone will be too confused to care. So Democrats have to raise the debt ceiling through reconciliation, and they don’t want to. Why? Because they don’t. It’s complicated, sure, but they could do it and they don’t want to. They are furious that they’ve cooperated on the debt ceiling under Republican controlled Senates with Republican presidents and aren’t getting the same courtesy.

What would minting a trillion dollar coin mean?

How does this work? Minting the coin would not raise the debt ceiling. Only congress could do that. Minting the coin, proponents of this idea argue, would allow Treasury to keep spending money without additional borrowing. This idea has been around since 2011, when a blogger named Carlos Mucha writing as “beowulf” floated it as a debt ceiling work around. It is legal for the Secretary of the Treasury to issue platinum coins “in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.” We probably have this provision so that the Secretary of the Treasury can celebrate certain people or events. But the law doesn’t restrict this power to just commemorations. — this has been legal since 1995 after a lobbying effort from coin collectors. Everyone has lobbyists! The US Mint already produces a one-ounce Platinum Eagle and could quickly change the mold to create a 1 trillion coin. The coin could then be deposited at the New York Fed via a quick helicopter rider. The trouble isn’t minting the coin. It’s spending it. Platinum coins are numismatic — they are rare and collectible . They’re investments, not actual money. They’re not meant to go into circulation. They’re made from valuable metals and are often sold for a higher value than they’re actually worth. So, is there a coin collector somewhere who is going to pay about $1 trillion for this platinum coin? I mean, I guess we shouldn’t rule it out but I’m not super comfortable with that as the direction for ensuring that the government continues to operate normally. Proponents think the that Federal Reserve could just purchase the coin from the Treasury, but the Federal Reserve doesn’t have authority to buy coins directly from the Treasury. It can only buy government bonds in the open market. That’s because the Federal Reserve isn’t supposed to issue money to finance government spending. Would minting a coin cause inflation? Proponents say no because it isn’t paying for new spending — it’s preserving the status quo spending that Congress has authorized. It’s just keeping up with debt obligations.

Where’s the administration on this?

Jen Psaki said that the administration has looked at the option of minting a coin to avoid the debt limit but doesn’t see it as a viable option. The administration believes that congress must act. Janet Yellen said that’s a Gimmick that comprises the independence of the Federal Reserve and would damage trust in both Congress and the administration to pay the country’s bills. She says the Federal Reserve cannot just print money to cover deficits that Congress is unwilling to cover. It conflates monetary policy and fiscal policy. Paul Krugman is a proponent of minting a trillion dollar coin, even though he agrees with Janet Yellen that it’s a gimmick. His point is, is it a silly gimmick? Sure, who cares? The stakes here are really high and republicans aren’t even pretending to be serious legislative partners acting in the country’s best interest. He even says, it might be found to be illegal by a court. Who cares? It could buy some time. For some proponents, the gimmick is the point. You have a whole lot of people screaming from the rooftops that the economic policies we’ve been taking as gospel for a few decades are made up, and why not just show that they’re made up

What happens now?

Some softening around the Republican position - Lindsay Graham said to Politico that he doesn’t want to put the nation’s credit at risk. “I mean, I’m not going to be a complete asshole about it. But I’m going to make them take some tough votes.” Potential to do a filibuster carve-out

Resources:

https://www.nytimes.com/2021/10/01/opinion/biden-coin-democrat-republican-debt-limit.html

https://www.businessinsider.com/trillion-dollar-coin-minted-within-hours-potential-emergency-decision-yellen-2021-10

https://www.reuters.com/world/us/yellen-says-debt-ceiling-hike-utterly-essential-opposes-platinum-coin-gimmick-2021-10-05/

https://abc7chicago.com/us-debt-ceiling-national-what-is-the-social-security/11075115/

https://www.nytimes.com/2021/09/29/business/dealbook/debt-limit-default.html

https://www.thebalance.com/who-owns-the-u-s-national-debt-3306124

https://nymag.com/intelligencer/2021/09/debt-ceiling-mint-the-coin-explained.html

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