Treasury should only use a trillion dollar coin as insurance against an outright debt default
It doesn't look like it, but this is the world's scariest chart. It's the Bipartisan Policy Center's analysis of how much money will come in and how much is supposed to go out of the government's coffers on February 15. It sounds achingly boring, and it should be, but it won't if Congress doesn't raise the debt ceiling. Notice incoming revenue won't even cover the interest on our debt on this particular day. There are no words for how bad this would be.
Help us, trillion dollar coin, you're our only hope.
Nobody knows when we'll hit the debt ceiling, or what will happen if we do, but we can make some educated guesses. The Bipartisan Policy Center figures the Treasury's "extraordinary measures" won't be enough to keep us from hitting the debt limit sometime between February 15 and March 1, and from there it's anybody's best guess. Remember, not raising the debt ceiling stops the Treasury from borrowing new money to pay old bills, leaving us to pay what we can with incoming revenue. In other words, it's like an immediate balanced budget amendment ... while playing Russian roulette with the full faith and credit of the United States.
As my colleague Derek Thompson explains, a world without a debt limit increase is a world where the government has to stop paying 40 percent of its bills overnight. Everything from food stamps to defense spending to maybe even Social Security benefits would go unpaid. Now, Congress would presumably relent after a few weeks of this, but if it didn't, the economic damage would be mind-blowing. Here's the depressing math. The government spends about $3.6 trillion a year, which means going past the debt ceiling will suck about $1.4 trillion out of the economy over a year. Yet it gets worse. With the Fed already doing about as much as it will, the multiplier on government spending is almost certainty quite high -- say 1.5 -- so that $1.4 trillion less is more like $2.16 trillion less. To put that in perspective, that's -14.4 percent GDP growth on an annualized basis. Yes, that's a negative sign there. And this probably understates things, since we haven't even tried to account for the negative wealth effect from the inevitable market meltdown.
Ready for the really bad news? Even if the Treasury prioritized payments, it's far from clear it could avoid defaulting on our debt. That sounds impossible since 1) we wouldn't prioritize anything above paying the interest on Treasury bonds, and 2) interest payments are only about 9 percent of revenues, but it's the terrifying truth. Incoming revenues and expenditures are, as Josh Barro of Bloomberg View puts it, "lumpy". Some days not much money comes in and lots of money is supposed to go out on interest payments. As you can see in the chart at the top, February 15 is one such day, with daily inflows expected to fall $21 billion short of meeting interest payments due. Maybe Treasury could try to save up in advance or sell whatever assets it could, but that's a dangerous game -- and a game that gets more dangerous the longer it lasts. The Treasury would have a heck of a time trying to project how much money will come in during a protracted standoff, because the collapsing economy would mean collapsing revenues. At best, it could hunker down and hoard all its cash for interest payments -- and hope a court doesn't rule against such prioritization before the debt ceiling is raised.
If it came to that, the consequences of an actual debt default are almost unthinkable. Treasury bonds are supposed to be the safest assets in the world -- as good as cash, as far as the financial system is concerned. Banks use them to meet capital requirements, and all sorts of financial institutions use them as collateral in repo transactions, which makes them tantamount to "money". As the chart below shows, the amount of such near-money has yet to recover from the financial crisis, as the private sector hasn't created enough safe debt to replace mortgage bonds that turned out not to be so reliable. Removing Treasuries from this pile of risk-free assets would have dire and unpredictable repercussions that could easily turn into another Lehman moment. And the government wouldn't even be able to bail out the financial system this time, since it wouldn't be able to borrow the money it would need to do so.
And that brings us to the trillion dollar coin. If you haven't heard, there's a law that technically lets the Treasury mint platinum, and only platinum, coins in whatever denomination it chooses. It's legal, it's doubtful anybody would have standing to challenge it in court, and it would let us keep paying our bills, without setting off massive inflation, if the debt ceiling isn't raised. But as Ross Douthat and Ezra Klein point out, the politics of it are toxic. It sounds crazy, and it would look like a crazy power grab, all of which would empower the very Republicans pushing us towards a possible default. Risking complete catastrophe is worth it if it will break the swamp fever according to this logic. That very well could be true if we were talking about a run-of-the-mill catastrophe, but it falls apart when we're talking about a debt default. The financial fallout and increase in our long-term borrowing costs are much too high a price to pay for discrediting the default caucus. Here's the way out. If Congress doesn't lift the debt ceiling in time, Treasury should prioritize payments while Obama and Republicans negotiate an increase. But if a day ever comes when incoming revenues won't meet interest payments, Treasury should mint a platinum coin to cover the difference. As Steve Waldman argued, use a billion dollar instead of a trillion dollar coin -- and only as a last resort to avoid irrevocable damage.
The full faith and credit is worth a platinum coin.
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Matthew O'Brien is a former senior associate editor at The Atlantic.