January 18, 2013 by Shawkat Hammoudeh
In the United States, the president must get the approval of Congress to raise the public debt limit every time government spending reaches the imposed limit. If Congress and the president do not reach an agreement, the credit rating agencies then consider the government to be in default. Thus, if the debt ceiling is not raised, the government cannot pay its employees, contractors and suppliers. Additionally, veterans and dependents of Social Security benefits will also be shortchanged. If such a calamity were to occur, the U.S. could potentially face another debt crisis, right after emerging from the fiscal cliff at the close of last year.
The United States went through a debt limit crisis in 2011 and paid a heavy price for it. The crisis was a setback, causing economic growth to drop from more than 3 percent to less than 1 percent. The credit rating agencies dropped the U.S. credit rating by one notch. Under normal conditions, a drop in a country’s credit rating would lead to a spike in its interest rates, but the United States has been in a liquidity trap and is facing a zero lower bound, thus escaping a sharp increase in interest rates.
In February, the United States will face a new debt ceiling if the president and Congressional Republicans do not agree on spending cuts, as was stipulated in the 2011 debt ceiling limit deal. If there is no deal by Feb. 15 to raise the $16.4 trillion limit, the risks this time are greater than they were in 2011.
Some ideas have been proposed to deal with the looming debt ceiling. Aside from selling government assets such as gold and student loan portfolios at discounts, one idea calls on the president to make use of an article in the 14th Amendment to the Constitution that stresses the validity of the public debt. Some Democrats, including former President Clinton, have urged the president to be ready to use the 14th Amendment to get around Congress and avoid the ceiling. The president, however, does not see such a move as legal and will not use this option.
Others came up with the platinum coin option to generate additional revenue, which the government can use to sidestep Congress. The idea of minting a platinum coin to avoid the debt ceiling comes from a few crucial sentences appended onto the 1997 Omnibus Consolidated Appropriations Act. “Notwithstanding any other provision of law,” it states, “the Secretary of the Treasury may mint and issue platinum coins in such quantity and of such variety as the Secretary determines to be appropriate.” These sentences give the president the flexibility to mint platinum coins of unlimited value.
This option calls for creating $1 trillion by minting the platinum coins and placing these coins with the Federal Reserve. For this option to work, the government would have to deposit the coins in a Treasury account at the Fed, which in turn would credit the account with the $1 trillion. The government could then use this account to pay the nation’s bills. The Fed would have to treat it as a legal way for the Treasury Department to create currency. Otherwise, the platinum coin would be worthless.
This option may have some merits other than bypassing the debt limit. It could increase inflation expectations and actual inflation, which may be a feasible way to get out of the liquidity trap and increase aggregate demand. However, this option’s costs outweigh its benefits because it would reduce the credibility of the U.S. government and it will not solve the debt problem. It would instead portray the president as grabbing power from Congress, which would worsen the relationship between the president and Republicans. It could spook the financial markets and consequently make an already weak recovery feebler.
Shawkat Hammoudeh is a professor of economics at Drexel University. He can be contacted at firstname.lastname@example.org.