The currency, the constitution, premium bonds: the solutions to the debt limit
Move on, trillion-dollar coin, there’s a new city debt limit solution — and it sounds more sophisticated, which some proponents have suggested would be more likely to work.
For years, debt limit skeptics have argued that the United States can get around the limit on how much it can borrow by minting a large-denomination coin and depositing it into the government’s account at the Federal Reserve. Officials could then use the resulting money to pay the country’s bills. The maneuver would take advantage of a quirk in US law that gives the Treasury Secretary wide discretion when it comes to minting platinum coins.
But there have always been challenges with the idea: the treasury has shown little appetite. It is unclear whether the Fed would adopt the coin. It just sounds unconventional to the point of absurdity. And now some are arguing for a nicer-sounding alternative: premium bonds.
The government typically finances itself by issuing debt in the form of financial securities called bonds and bills. They are worth a fixed amount after a fixed period of time – say $1,000 in 10 years – and they pay “coupons” twice a year in between. Typically, those coupon rates are set close to market interest rates.
But in the premium bond idea, the government would renew old, maturing bonds at higher coupon rates. This technically wouldn’t add to the nation’s debt — if the government previously had a $1,000 10-year bond outstanding, it would still have a $1,000 10-year bond outstanding. But investors would pay more for a bond paying $7 per year than one paying $3.50, so by promising a higher interest rate, Treasury could raise more money.
Are the higher interest rates, which would cost the government more money, a problem? Non-technical. The debt limit applies to the nominal value of outstanding federal government debt ($1,000 in our example), no future promises to pay interest.
And the idea can also come in a slightly different flavor. The government could issue bonds that pay regular coupons but never pay back the principal, or perpetual bonds. People would buy them for long-term cash flow, and they wouldn’t add to the principal of the outstanding debt.
The idea of a premium bond has received support from some big names. The economic commentator Matthew Yglesias brought it up in January, Bloomberg columnist Matt Levine written about it, and The New York Times columnist and Nobel Prize-winning economist Paul Krugman made a case for it this week.
But even some proponents of prime bonds recognize that it could raise legal challenges or damage the reputation of the United States in the eyes of investors. In addition, their design and release should be done quickly.
“Typically, Treasury implements changes slowly, with a lot of consultation with bond market participants and auction announcements beforehand,” said Joseph E. Gagnon, an economist at the Peterson Institute for International Economics, adding that the government may need to offer a discount. .
But, he added, “it’s certainly better than defaulting” and he “would argue it’s better than not paying employees or retirees.”
While the idea of a premium bond may come in a different package, it shares many similarities with the coin idea. Both plans would exploit a loophole to increase the state coffers without actually lifting the debt limit. Since both are seen as gimmicks, it can be difficult for either to become a reality.
Of all the options the government could use to unilaterally circumvent the debt ceiling, “they are, in our view, the least likely,” said Chris Krueger, policy analyst at TD Cowen.
But a solution that hinges on the 14th Amendment could gain wider support, Mr. Krueger said. That would use a clause in the constitution that says the validity of the national debt should not be questioned.
Some legal scholars argue that language exceeds the legal borrowing limit, which currently caps the federal debt at $31.4 trillion. The idea is that the government’s responsibility to pay what it owes would override debt limit rules – so the debt limit could be ignored.
It wouldn’t be a perfect solution: The move would trigger an immediate lawsuit and could create uncertainty in the bond market, even its proponents admit. Still, some White House officials have explored the option.