Don’t try to appease economic terrorists

A few days ago I received an automated SMS from my bank.

For some reason, the bank’s algorithm marked a valid charge on my debit card as potentially questionable; the message asked me to verify the purchase.

In a rational world, increasing the federal debt limit would be considered equivalent to typing “1” in response to that message:

recognize a purchase already made.

No, raising the debt limit doesn’t give the president the freedom to spend what he wants.

It simply allows the government to deliver on its promises, which include everything from paying interest on debt to sending checks to Social Security recipients.

These promises, duly authorized by Congress, exceed the expected amount of taxes and other income, so they must be met, in part, by loans; but this is normal operating procedure, and financial markets are enchanted lend us the money.

Unfortunately, a quirk of the US budget process requires that Congress, once budget legislation is enacted, re-vote to authorize the Treasury to raise the funds needed to implement the law.

And the Republicans — who had no problem with large-scale loans when Donald Trump was in the White House – now they are preparing to turn that particularity into weapon.

We officially hit the debt limit this week, but accounting maneuvers can delay a crisis for several months.

But what happens when these maneuvers run out?

US government operations will be disrupted: Republican claims that they have a way to “prioritize” payments, delivering on some promises but not others, so as to limit the damage are almost certainly nonsense.

Even if, say, the interest payments could be sustained, we’d leave everyone from investors to suppliers wondering if the United States can’t be trusted to pay their bills.

Also, US debt plays a special card in world markets, which consider federal bonds to be the safest asset par excellence, guaranteeing many transactions.

If investors lose confidence that the US Treasury will deliver on its promises, it could lead to a global financial meltdown (which came close to happening in March 2020, when COVID-19-ravaged markets rushed in search of liquidity).

A debt crisis would therefore be bad and possibly catastrophic.

So should Democrats give in to Republican demands?

Not.

A party that barely controls one house of Congress should not be imposing policies deeply unpopular to the nation as a whole.

And it’s not even clear whether the Biden administration could surrender if it wanted to.

Current crop of House Republicans make the Tea Party, who (unfortunately) used the debt limit to blackmail the president Barack Obamait seems reasonable.

Today’s GOP doesn’t even seem to have a consistent set of demands; a significant number of caucus members may want a crisis, preferring to “watch the world burn” under a Democratic administration.

What are the alternatives then?

I see three possible main paths.

First, while it remains puzzling that Democrats didn’t raise the debt limit while still in control of Congress, there may still be a legislative solution:

Democrats could request a “dump-off petition” to force a vote on raising the debt limit despite opposition from Republican leaders.

This would take time and the support of a handful of sane Republican members of the House. But it’s definitely worth a try.

Second, it is probably possible to use financial engineering to get around the debt limit.

The most famous proposition is to coin a platinum coin with a face value of, say, $1 trillion, deposit that currency with the Federal Reserve and spend from the bank account thus created.

Believe it or not, it is almost certain that this would be nice.

Another option would be to raise money by issuing “prize bonus“on maturity of existing debts:

bonds whose face value is the same as the bonds they replace, so they don’t officially increase debt, but offer high interest rates, so they sell for much more than their face value.

It would, of course financial tricks.

AND?

If deception is to be resorted to to thwart the plans of destructive extremists augmented by a legal whim and thereby avert financial catastrophe, so be it.

Finally, there are a couple of options that I consider constitutional.

The 14th amendment to the Constitution says that the validity of public debt “cannot be called into question”, which could be interpreted as a reason for ignore the debt ceiling instead of defaulting on payments.

Alternatively, it seems fair to say that the White House faces incompatible demands.

Congress specified, through duly enacted laws, the levels of federal spending and taxes; But one chamber of Congress appears poised to tell the president that he can’t raise the money he needs to comply with past legislation.

How it looks like the president Joe Biden cannot avoid breaking at least some laws if the debt ceiling is not raised, ignoring the debt ceiling may be the option “less unconstitutional”.

Which option should Democrats pursue?

I would say everything.

Above all, this is not the time for officials to worry about looking foolish or unworthy.

The Biden administration is facing the threat of economic terrorism, which sounds extreme, but is basically what it amounts to creating an artificial debt crisis.

and must do whatever is needed to deal with that threat.

c.2023 The New York Times Society