Bloomberg News

Debt Limit Showdown Spurs Debate On Trillion-Dollar Coin

January 08, 2013

The looming showdown between President Barack Obama and congressional Republicans over raising the $16.4 trillion federal debt limit has made alternatives including minting a trillion-dollar coin or invoking a constitutional amendment to pay the bills part of the political debate.

So far, the Obama administration isn’t participating.

The proposal for the Treasury Department to mint a platinum coin worth $1 trillion and deposit it at the Federal Reserve to give the U.S. enough money to pay its debts has been advanced by Representative Jerrold Nadler, a New York Democrat, and Nobel laureate Paul Krugman. Representative Greg Walden, an Oregon Republican, said yesterday he would introduce legislation to block any such move.

The ideas underscore growing unease in Washington as the U.S. reaches the debt limit and Obama and the Republicans move closer to a confrontation over increasing it. Republicans are demanding spending cuts in exchange for raising the limit, while Obama says he won’t negotiate on the issue. Treasury Secretary Timothy F. Geithner took extraordinary measures on Dec. 31, when the U.S. was $25 million below the ceiling, to avoid breaking through it.

“A trillion-dollar currency is ridiculous,” said Chris Krueger, senior policy analyst at Guggenheim Securities LLC in Washington. “This is not something that a first-rate power should even consider.”

Theoretical Option

Krueger’s Dec. 5 research note helped spur interest in the idea by mentioning such coins as a “theoretical” option, while calling it “very low probability.” An online petition to the White House requesting the coin was initiated Jan. 3 and received more than 6,200 signatures as of 11:30 a.m. today.

Proponents say the Commemorative Coin Authorization and Reform Act of 1995 allows the government to issue a platinum coin in any denomination it chooses. The law says the Treasury secretary may “mint and issue platinum coins in such quantity and of such variety as the secretary determines to be appropriate.”

Treasury spokesman Matthew Anderson declined to comment on the coin proposal yesterday.

Krugman wrote in his New York Times blog yesterday that Obama should be willing to mint a $1 trillion coin “if Republicans try to force America into default.” Obama will “be faced with a choice between two alternatives: one that’s silly but benign, the other that’s equally silly but both vile and disastrous,” Krugman wrote. “The decision should be obvious.”

14th Amendment

Nadler spokesman Ilan Kayatsky said today the congressman “has endorsed the idea, but only as a last resort if all else fails.” Nadler “also has endorsed the 14th Amendment and has introduced a bill to repeal the debt ceiling in the same spirit,” Kayatsky said in an e-mail.

The Constitution’s 14th Amendment says the validity of the public debt of the United States “shall not be questioned.” The White House has dismissed the idea of invoking the amendment to get around the debt limit.

“This administration does not believe that the 14th Amendment gives the president the power to ignore the debt ceiling -- period,” White House press secretary Jay Carney told reporters Dec. 6.

House Minority Leader Nancy Pelosi, a California Democrat, said Jan. 4 that she would invoke the amendment “in a second.” Former President Bill Clinton said in July 2011, when the White House and congressional Republicans were wrangling over the debt limit, that he would have used the amendment and forced the courts to stop him.

Pay Bills

The Treasury will run out of funds to pay its bills between Feb. 15 and March 1, the Washington-based Bipartisan Policy Center said in a report yesterday.

The Obama administration’s “overwhelming preference” would be to avoid invoking the 14th Amendment or minting a coin, said Stan Collender, a former aide to the House and Senate budget committees who is now a partner at Qorvis Communications in Washington.

“But faced with an alternative of spending cuts they don’t think are wise or would be harmful to the economy, and Republicans refusing to raise the debt ceiling, if pushed into that kind of situation, I think the president might very well do it,” Collender said.

The debt limit is the amount the government can borrow to meet obligations that were authorized in the past by Congresses and presidents. It doesn’t fund new spending. Congress has raised or revised the ceiling 79 times since 1960, including 49 under Republican presidents, according to the Treasury Department.

Credit Rating

Standard & Poor’s lowered the U.S. credit rating in August 2011 after months of debate between Obama and congressional Republicans over whether to raise the limit. Though the impasse ended with Obama signing a debt-ceiling increase, S&P downgraded the U.S. three days later, citing political gridlock in Washington and the nation’s long-term fiscal challenges.

Investors were undeterred by the rating change and Treasuries staged their biggest rally since December 2008, returning 2.8 percent in August 2011.

Obama reiterated in his weekly radio address last weekend that he won’t negotiate with Republicans this time on raising the ceiling.

In 2011, the Treasury repeatedly rejected suggestions that it could use prioritization to make some payments while skipping others.

Krueger said he doesn’t think the U.S. would default on bonds. After that, deciding whom to pay is like “picking your favorite child.”

Air Traffic

“Prioritization is a massive political problem,” he said. “Do you pay air traffic controllers? Do you pay prison guards? Do you pay Social Security? Do you pay the troops? It’s an impossible political question.”

Steve Bell, senior director of economic policy at the Bipartisan Policy Center, said he doesn’t think the U.S. would try either the coin or the constitutional amendment.

“I cannot imagine the United States not paying its debts in full and on time,” said Bell, a former Republican Senate Budget Committee aide. “Despite that we always go to the last day at 11:59 and everything, we always seem to get something cobbled together.”

To contact the reporter on this story: Ian Katz in Washington at ikatz2@bloomberg.net.

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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