In recent weeks, the looming debt ceiling crisis has intensified, casting a dark shadow over Washington, D.C. The prospect of a government default, once dismissed as unlikely, has gained significant attention. Historically, Congress has consistently raised the debt ceiling since its inception in 1917. Although near-default crises emerged twice during the Obama administration due to Republican majorities, the prevailing sentiment among experts suggested a familiar pattern for 2023. However, a shift has occurred, capturing the attention of lawmakers and investors alike, as the anticipation of turbulence in the bond market becomes undeniable.
Yet since mid-2022 House Republicans have insisted that they will require significant concessions from Democrats before allowing a debt ceiling increase. Other members of this caucus have gone further, incorrectly claiming that default would be beneficial, that the Treasury has overstated the risks, or that a government default is the same thing as a government shutdown.
Over Memorial Day Weekend, President Joe Biden and House Speaker Kevin McCarthy (R-Calif.) managed to reach a tentative agreement to institute a two-year suspension of the debt limit instead of merely raising it. Congress will have to vote on the Fiscal Responsibility Act of 2023. If somehow this plan doesn’t get voted into law, Democrats have a few options in Congress and the White House to avoid economic disaster.
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House Democrats have introduced several bills to raise the debt ceiling over the past three months. Up until this latest tentative bill, Speaker McCarthy has blocked the legislation citing opposition from his majority.
Even if Speaker McCarthy had blocked this latest version, Democrats could have introduced a motion known as a “discharge petition.” This is a call for putting some law to a vote on the floor of the House even if the Speaker opposes it. If proponents can get a majority of House members to support the petition, their bill goes to a vote. If a majority of the House votes for the bill, it passes.
In theory, Democrats had a discharge petition at their disposal for their bill to raise the debt ceiling. The trouble is that, to do this, they would still need at least five Republican to both advance the petition and pass the bill. That would have been extremely unlikely.
Statutory Construction – The Last-In-Time Rule
Failing an act of Congress, the Biden Administration will need to act unilaterally to prevent a government default. So even if Congress doesn’t pass this tentative deal between Biden and McCarthy, the cleanest option to avoid disaster would be for the administration to order Treasury officials to ignore the debt ceiling and continue borrowing as normal under a theory of statutory construction.
The first option for this is known as the “last-in-time” rule. When two laws contradict each other, making it impossible to simultaneously obey both, the most recent law takes priority. In some cases, courts have even held that a more recent law can implicitly repeal a contradictory law when the conflict is clear enough.
Here, the administration would assert that the debt ceiling conflicts with the federal budget. In 2021, Congress passed a debt ceiling bill limiting the Treasury’s authority to borrow. In 2022, Congress passed a budget directing the Treasury to spend and distribute money. It is now impossible for the Treasury to obey one of these laws without breaking the other. Given this conflict, the administration must choose which law to obey. Standard statutory construction requires that it honor the more recently passed budget.
Statutory Construction – The Least Harm and Least Absurd Rules
There are several methods of statutory construction when laws contradict each other. Along with the last-in-time rule there are also the least harm and absurdity rules. Under this approach, lawyers look at two conflicting laws to determine what approach will do the least overall harm and which will lead to the least absurd result.
Here, like with the last-in-time rule, the Biden Administration would instruct the Treasury to disregard the debt ceiling as in conflict with its obligations under the federal budget. To resolve this conflict, the administration would assert that borrowing money is a regular function of government that will cause less harm and absurdity than wiping out the jobs, homes and savings of an estimated 8 million Americans. Relying on that theory of statutory construction, the administration would once again assert that it is bound to honor the budget and disregard the debt ceiling.
Both methods of statutory construction are strong options for the Biden Administration as they give the Supreme Court a way to duck the issue in an inevitable lawsuit. Typically, the Court treats inter-branch conflicts as a political issue, something to be resolved through negotiations and elections. This approach allows the Court more leeway to say that Congress can clarify its intent if it so chooses, allowing the justices to avoid the messy business of triggering a recession.
Constitutional Law – The 14th Amendment Option
Once again, under this option the Biden Administration would direct the Treasury to ignore the debt ceiling altogether. Here, the basis would be the text of the 14th Amendment which states, in relevant part, that “[t]he validity of the public debt of the United States, authorized by law… shall not be questioned.”
The argument here is straightforward. The government incurs debt every time Congress sets an obligation and the Treasury borrows money. Contemporaneous records suggest that the public debt section of the 14th Amendment was included specifically to prevent politicians from leveraging the government’s credit for political purposes. As a result, to the extent that the debt ceiling prevents the government from paying its bills, it is unconstitutional.
This has the virtue of simplicity. However, unlike a statutory construction approach, it all but insists on involving the Supreme Court. The justices consider it their job to say what is or is not constitutional. Unlike statutory construction, which they could write off as a political spat, they would very likely intervene in a debate over this novel interpretation of the 14th Amendment, adding a new complication to the matter.
The Trillion Dollar Coin
If Democrats in Congress cannot raise the debt ceiling and the Biden Administration chooses to honor it, the next options are financial. The first, most common, choice is known as “minting the coin.” We unpack the trillion dollar coin option in depth in our related explainer, but in brief:
The trillion dollar coin relies on an obscure subsection of the Mint’s coinage law from 1997. This section says, in relevant part, that the executive branch may “mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.”
The purpose of this section was to let the Mint create commemorative coins to sell as souvenirs and other minor fundraising efforts. But the effect is to give the Mint authority to produce coins in any denomination at all so long as they are made of platinum.
So, the Mint could strike a platinum coin with a face value of $1 trillion. It could deposit this with the government’s account at the Federal Reserve and, in the same way that handing a $100 bill to a bank teller puts $100 in your checking account, the Treasury’s spending power would increase by $1 trillion. The Treasury could then use that spending power to continue paying the government’s bills until normal borrowing resumes.
High Interest Bonds
This one is technical. But, in a nutshell, the Treasury could raise money by re-issuing currently authorized debt at a much higher interest rate and selling it above face value.
Like all bonds, Treasury debt has a coupon rate and a par value. The coupon rate is the interest that holders receive, while par value is the lump sum repayment that the Treasury makes when the asset matures.
When the Treasury calculates its overall debt, it only includes the par value of each asset, not the lifetime interest that it will pay. So, for example, when the Treasury issues a $100 bond at a 2% interest rate, it has added $100 to the national debt. As the Treasury repays existing bonds, it lowers its overall debt and can effectively re-issue that bond again without needing additional borrowing authority.
So how does this help?
In general, investors pay the asset’s par value when they buy Treasury debt. For example they might pay $100 to buy a $100 bond. However sometimes the combination of interest rates and security pushes that value up. For example, when interest rates are particularly good an investor might pay $101 for a $100 bond.
Since the debt ceiling only takes par value into account, this lets the Treasury raise more money than it technically owes by selling bonds at more than par value. For example, in our case above, the Treasury would have raised $101 while only increasing its debt by $100.
As existing bonds mature and get repaid, the Treasury will have authority to issue new debt under the current limit. It could issue those new bonds with extremely high interest rates to attract investors who would pay enough money to meet the government’s needs. For example, when an existing $100 bond matures, the Treasury could issue a new $100 bond with a 10% or 15% interest rate in order to attract investors who might pay $120. This would let the government raise much more money than it owes on paper.
It could do the same with an asset known as “consol” or “never-ending” bonds. These are bonds with no fixed repayment date. The government repays them at its discretion. With no maturity date, consol bonds do not add to the calculation for current government debt, and so do not trigger the debt ceiling. But, as with re-issued bonds, investors would demand extremely high interest rates before they will invest in such a speculative asset.
And that’s the downside here. In both cases, the Treasury would rely on an accounting gimmick. Instead of increasing the government’s lump-sum debt, it would explode the government’s long term interest obligations. These higher payments would last for years, creating a significant financial cost to achieve the exact same level of borrowing.
The Bottom Line
If necessary, Democrats have a handful of options to prevent a catastrophic government default. They range from legal to financial maneuvers.
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