On January 19, the United States reached a somewhat arbitrary debt cap of $31.381 billion, above which no additional dollar of debt may be added. Bankruptcy has been avoided for the time being thanks to the tricks of the Ministry of Finance, which, among other things, postponed contributions to state pension funds. But this extension is not infinite. The money will really run out at the beginning of June. Hence the debt limit must be increased, otherwise there will not be enough money to pay off the outstanding government debts.
About the author
Dan Baliger is the newspaper's economics correspondent De Volkskrant . He writes about financial markets and central banks, among other things. in Capital importance Delves into the fascinating and fascinating economic events.
There is a conceivable legal solution to the new expenses. The Biden administration can resort to the Fourteenth Amendment to the US Constitution, which states that “the validity of the public debt of the United States […] Nothing can't be disputed. But that would guarantee a constitutional crisis, and the question is whether Biden wants that.
There are other conceivable tricks to prevent bankruptcy. For example, the US central bank can buy government bonds that are at risk of default. The Fed actually considered this scenario a decade ago, as a recent 2013 conference call shows, when central bankers also had to worry about the debt ceiling.
However, is this the option the Fed wants to put in place? Jerome Powell, the current central bank chairman who was still a director at the time, said he would find such intervention “appalling” but acceptable “under certain circumstances.” He finds that ambiguity is an asset. If the Fed explained very clearly what it would do in this situation at any given time, politicians would feel less pressure to actually raise the debt ceiling.
The Finance Minister cannot be completely reassured, even though Janet Yellen herself was director of the central bank ten years ago, and therefore was also present at that meeting. Her department has other options it can explore to avoid bankruptcy.
For example, Yellen could use arcane legislation (which was actually intended to create souvenirs) to mint a trillion-dollar platinum coin. If the Treasury then pledged that currency to the Federal Reserve, it would have enough money to pay the bills.
However, this strategy is not without risks. The Fed can reject the currency because it is a political maneuver that would raise serious doubts about the independence of the central bank.
Then there's another trick that has a better chance, because Jerome Powell and his cronies can't make a fuss about it. It is necessary that the debt limit only sets a limit on outstanding government debt. Therefore, future obligations to pay interest are excluded.
This makes it possible for the government to issue debt securities with a low face value, but a high coupon. Instead of collecting $100 on a ten-year bond at an interest rate of 3.6%, the government could offer an interest rate of 15.6% on a $100 bond. Investors would then be willing to pay $200 for it (i.e. an issue above par). At these ratios, the yield at maturity is exactly the same for both bonds.
Each time $100 came due, the Treasury could pay it off by selling $100 of new debt for $200, creating additional spending space. Politically this seems much easier than the platinum currency, precisely because it is much more difficult to understand. For example, the Ministry of Finance could talk about a “temporary solution” to avoid bankruptcy.
It is clearly not good for America's credibility in financial markets for the country to have to finance itself with accounting tricks. Common sense dictates that a solution must be found before this happens. At the same time, this ridiculous debt limit would not exist at all if it were just common sense, because it relates to financing expenditures approved by the US Congress itself. These will be exciting days ahead.
