NEWS + OPINION
The red alarm deadline to raise the debt ceiling could be as soon as Feb. 15 — but no later than March 1, according to the latest estimate from the Bipartisan Policy Center.
Less than two months after coming to terms with the fiscal cliff legislation, Congress is headed for more divisive and heavily contested issues. Unfortunately, because of their utter incompetence, Congress was unable to reach a complete compromise for the fiscal cliff. Therefore, over $100 billion worth of spending cuts have been rescheduled two months down the road. Almost coinciding with those spending cuts is another bill of fiscal cliff proportions: the debt-ceiling shutdown.
So now two deadlines for separate bills stand before Congress within a very short time frame; both have the capacity to plague America’s economy (which means the world economy, by default) with avoidable yet detrimental circumstances. Despite the very real threat each bill poses if left ignored, the fast-approaching debt-ceiling takes precedence. The damage that could come as a result of a failed debt-ceiling compromise is much more far-reaching in its severity than the unfinished spending cuts. Allow me to explain why.
Firstly I think it’s important to distinguish the differences between a government shutdown and a debt-ceiling shutdown, as I do not believe they are well-known. Below is a quote from Shai Akabas, a researcher at the Bipartisan Policy Center:
In a government shutdown, the government is shutting down future obligations. With the debt ceiling, they’ve already obligated the money. They owe these people the payments now, and they can’t make them.
But how was the risk of debt-ceiling shutdown caused?
Here’s the short story…
When Congress increased the last debt ceiling they agreed on $16.394 trillion. As of December 31, 2012, the federal government had reached the limit (the specifics about how they reached that limit goes back to Washington’s spending problem and many other issues I won’t delve into right now). Since then the government has been running on “extraordinary measures” to ensure its timely and full payments. Desperate measures can only last so long, though. That’s where the estimated deadline from BPC (the above graph) comes from. If Congress doesn’t come to some agreement about a new debt ceiling by that time, the debt-ceiling shutdown commences.
The federal government is committed to more than 100 million individual payments between February 15 and March 15. Without borrowed money the federal government wouldn’t be capable of honoring 40% of these payments, which means it would default on 40% of its obligations. Can you imagine what kind of impact defaulting on millions of obligations would have on the economy? It would tear any investor’s confidence asunder. Other nations and even domestic investors would be hesitant about striking any sort of deals with the federal government because of extremely prevalent uncertainty.
Speculative consequences aside, the definite consequences could be an even greater threat to American well-being. If 40% of the loans are going to be unfulfilled, then the federal government may have to choose between the American people and the bond investors – and it is very possible that the bond investors could take priority. Complicating things even more, these millions of payments are carried out by a very complex system of computers. These machines are probably not designed to deal with defaulting, and they are almost certainly not programmed to prioritize payments in case of a debt-ceiling shutdown. This means that the U.S. government may not even be able to reprogram the devices for this potential emergency. The result is a perplexing and possibly somewhat random allocation of funds to 60% of the promised payments. Will Social Security get funding? What about Medicare? Any of the bond investors? Or maybe the FBI, CIA, transportation and education will get shafted? Nobody outside of the higher-ups in government know the answer, but all possibilities are troubling and inadequate.
Everybody agrees that defaulting is disastrous, but one party sees the bill as something other than an emergency; Republicans also see it as a bargaining chip. Republicans have made their terms very clear: without proportional cuts in spending they will not permit a heightened debt-ceiling. The GOP has incurred significant blowback because of this rigid form of compromise. Still, they refuse to waver.
The immovable Republicans have caused Democrats to scramble for other means of raising the debt ceiling. So far, two odd ideas have risen to the surface. The first?
- Letting President Obama interpret (very loosely, might I add) the 14th amendment in such a way that allows him to bypass Congress entirely
Below is the controversial loophole in the 14th amendment which has been exploited by various attorneys:
“The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”
The White House denounced this tactic as unconstitutional, but it could still be on the table as a last-ditch effort. It does not come without immense risk, though; President Obama may be subjected to impeachment if he were to embrace this 14th amendment loophole.
What about the second loophole?
- Issuing a $1 trillion platinum coin to pay back some debt
Below is the reasoning behind this idea from a news article:
Treasury is forbidden from printing money to cover government deficits. Treasury must issue debt, while the Federal Reserve independently controls our nation’s monetary printing press.
That is exactly as it should be. But there is an arcane exception for platinum coins. To serve coin collectors, Treasury can issue platinum coins of any denomination. That creates an intriguing loophole: Treasury could bypass the collector market and mint a $1 trillion platinum coin. By depositing it at the Federal Reserve, Treasury could keep paying bills after we’ve fully exhausted our borrowing limit.
Like abusing the 14th amendment, this idea is also controversial. Furthermore, it is outright impractical in the business world. What kind of purchase would require one unit of $1 trillion? There has been talk of much smaller increments which, at the very least, would be more realistic to carry out payments.
One should also consider how other countries could perceive us minting a $1 trillion coin to bypass a debt-ceiling shutdown. Their confidence would most likely fall dramatically so the private sector’s success, federal government’s loans and our credibility as a whole would wane. Is it better than a default? Yes, but it is still a failure.
** It is important to note that weakened confidence could also be an outcome if President Obama overrides Congress through the shady interpretation of the 14th amendment.
Lastly, minting such a coin only delays the inevitable. It is much better to solve our problems now instead of a year or two down the road. Conditions and relationships only worsen as brinkmanship lingers.
The preposterous extent that Congress is resorting to solve the problem without compromise is staggering. This is the time for Democrats and Republicans to sit down together and seriously reform the plethora of unsustainable policies in America. Nothing extremely drastic must be altered right now, but a few steps in the right direction should be the worst case scenario. If not, when can we expect to see Congress in such a precarious yet motivational predicament again?
This is their last chance to seriously discuss options to cut spending and begin a common sense approach to fixing our debt. Taxes have been put in place, addressing the spending remains. Without a step in the right direction this year, the debt-ceiling is destined to become a frequent side-effect of budgetary foolishness.
Solve the issue now, Congress. The price we will pay is too great to place on the nation if an agreement is not successful. Do what we elected you to to do as public servants: your job. And don’t stop there – do it well.