As Congress struggles to deal with the government shutdown, another budget battle looms: the debt ceiling. It’s almost like a crisis within a crisis (crisisception!). Basically, the federal government is only allowed to borrow a limited amount of money, which is currently $16.7 trillion. Technically, the government exceeded this limit in May, so the Treasury has resorted to a variety of measures to pay the government’s bills since then.

However, by Oct. 17, the government will run out of funding. Treasury Secretary Jack Lew has warned, “If we have insufficient cash on hand, it would be impossible for the United States of America to meet all of its obligations for the first time in our history.”

This would have disastrous effects for the economy. According to Senior Macroeconomist of PNC Bank Gus Faucher, failing to solve the debt-ceiling crisis would “all but wipe out” the economic recovery.

All discretionary spending, which includes education, housing, and most defense spending, would cease. Most mandatory spending, including Social Security, Medicare, and Medicaid, would also come to a halt. This would be disastrous for millions of Americans who are poor or retired and rely on these programs for survival.

The US government would also default on its debt.  Treasury bonds and the US dollar would tank while interest rates on these same Treasury bonds would soar as panicking investors demand higher returns before purchasing unstable US debt. Since interest rates on other federal loans (including student loans) are tied to Treasury rates, such a scenario would negatively affect a huge number of Americans, and the stock market would suffer massively as well. The US economy is a major component of an increasingly linked global economy, causing shockwaves to spread around the world.

In short, the world could be hit by an economic apocalypse just as bad—if not worse—than the Great Recession of 2008. Something must be done soon or everyone will lose.

The obvious solution is to simply raise the debt ceiling, which has been done 78 times since 1960. However, several issues suggest this is not a concrete long-term solution.

Republicans will likely block attempts to raise the debt ceiling unless they also defund Obamacare. More importantly, harmful battles over the debt ceiling will continue to consume our nation’s political debates for years to come should Congress implement their typical short-term solution. Thus, I propose four solutions to deal with the problem without raising the debt ceiling:

1.Declare the debt ceiling unconstitutional. The 14th Amendment states “the validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.” In other words, the government has to pay back its debt in full. Since the debt ceiling would force the government to default, it is unconstitutional.

2.  Mint a trillion dollar coin. Or a $16.7 trillion coin. A loophole in the Constitution allows Congress to put whatever value they want on coins, since Congress can “coin money” and “regulate the value thereof,” with no limit placed on that value. The Treasury could mint this coin, deposit it at the Federal Reserve, and buy back its bonds. It’s that simple. Furthermore, Joseph Gagnon of the Peterson Institute for International Economics has stated, “There’s nothing that’ s obviously economically problematic about it.”

3. A transaction tax. Financial blogger Simon Thorpe cites statistics from the Bank for International Settlements and the Depository Trust and Clearing Corporation to arrive at a total of $4,440 trillion in US financial transactions. A small tax of 0.1 percent on these transactions would be enough raise $4.44 trillion, wiping out the deficit in one fell swoop. Furthermore, this would be enough money to eliminate all other federal taxes and start paying back our debt.  The effect of this tax on the average American would likely be negligible, yet the revenue obtained would be substantial. While some argue that such a tax could harm financial markets in the short term, the effects of such a shock would dwarfed by larger market fluctuations that occur all the time.

4. Borrow interest-free from the Federal Reserve. The government could simply have the Fed lend interest-free loans to the Treasury and buy up all the national debt. According to Ellen Brown, President of the Public Banking Institute, “this money is virtually free. This is because the Federal Reserve rebates any interest it receives to the Treasury after deducting its costs, and the federal debt is never actually paid off but is just rolled over from year to year. Interest-free loans that are never paid off are basically free money.” Canada, France, Australia, and New Zealand have done this before without any ill effects from inflation. Furthermore, in 2009 the Fed bought up $1.2 trillion in private debt. If private banks and corporations can fund themselves through the Fed, the government that gives the Fed its authority should be allowed to as well. Borrowing, say, half a billion dollars a year from the Fed would pay off all the national debt within three decades without causing a huge shock to financial systems.

The United States has already gone through an economic crisis worse than anything since the Great Depression. The recovery is still fragile, and America cannot afford to go through another financial meltdown. How we deal with the debt ceiling will determine whether the coming years will be ones of prosperity or financial ruin.

 

 

 

 

William Kim

1 Comment

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