The Coin, the Constitution, Premium Bonds: The Debt Limit Workarounds

Trillion dollar coin, the town has a new debt limit workaround – and while this sounds more sophisticated, some of its proponents suggest it could work better. I’m here.

For years, skeptics of debt limits have argued that the United States could circumvent the borrowing limit by minting large denominations of coins and depositing them in government accounts at the Federal Reserve. You can use the collected money to pay your state bills. The operation exploits a quirk in U.S. law that gives the Secretary of the Treasury broad discretion over minting platinum coins.

However, there were always challenges with this idea. The Treasury has shown little appetite. It is unclear if the Federal Reserve will receive the coin. It sounds unconventional to the point of being ridiculous. And now some are calling for a more elaborate alternative: premium bonds.

Governments typically raise funds by issuing debt in the form of financial instruments called bonds or bills. It’s worth a certain amount after a certain period of time (say, $1,000 in 10 years), during which he pays the “coupon” twice a year. These coupon rates are usually set close to market interest rates.

but, premium bond The government renews old expired bonds with a higher coupon rate. Doing so technically does not increase the national debt. If the government previously held her $1,000 worth of 10-year bonds, there would be $1,000 worth of his 10-year bonds remaining. But since investors would pay more for a $7 a year bond than a $3.50 a year bond, the promise of a higher interest rate would allow the Treasury to raise more money. .

Will these higher interest rates, which will cost the government more, cause problems? Not technically. The debt limit is face value of outstanding federal debt ($1,000 in this example) is not a future promise to pay interest.

Also, this idea could be delivered in a slightly different flavor. Governments can issue bonds that pay regular coupons but never return the principal, or perpetual bonds. People buy them for long-term cash streams and not increase the principal of their outstanding debt.

The idea of ​​premium bonds has gained support from some prominent figures.Economic commentator Matthew Iglesias brought it up In January, Bloomberg columnist Matt Levine said written About that, and New York Times columnist and Nobel Prize-winning economist Paul Krugman argued it this week.

But even some premium bond proponents admit they could face legal troubles and damage America’s reputation in the eyes of investors. Although the packaging may differ, there are many similarities with the coin idea. Both plans would exploit loopholes to increase government coffers without actually raising the debt ceiling.

The reality that both are seen as gimmicks can prevent them from becoming a reality.

Of all the options the government could use to unilaterally circumvent the debt ceiling, “they are the least likely, in our opinion,” said TD Cowen policy analyst Chris Krueger. rice field.

But a workaround that relies on the 14th Amendment could garner broader support, Krueger said. It would take advantage of the constitutional provision that the validity of public debt should not be questioned.

Some legal scholars argue that the language would overturn the statutory borrowing limit that currently limits federal debt to $31.4 trillion. The idea is that the government’s responsibility to pay what it owes takes precedence over debt limitation rules. Debt limits can therefore be ignored.

This would not be a perfect solution. Even its proponents admit that the move could soon be challenged in court and sow uncertainty in bond markets. Still, some White House officials are considering the option.

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