Move over, the trillion-dollar coin, there’s a new debt ceiling job in town — and it looks so complicated that some of its supporters have suggested it’s more likely to work.
For years, debt ceiling skeptics argued that the limit on how much the U.S. could borrow could be reached by printing a large denomination of currency and depositing it in a government account at the Federal Reserve. The resulting money can be used by officials to pay the nation’s bills. The maneuver would take advantage of a quirk in US law that gives the Treasury secretary wide discretion when minting platinum coins.
But there are always challenges with the idea: the Treasury has shown little appetite. It is unclear whether the central bank will adopt the currency. It seems unconventional to the point of absurdity. Now, some are advocating an interesting-sounding alternative: premium bonds.
The government usually finances by issuing debt in the form of financial instruments called bonds and bills. They are worth a certain amount after a certain period of time — for example, $1,000 in 10 years — and pay “coupons” twice a year in between. Typically, those coupon rates are set close to market interest rates.
But in Premium bond The idea is that the government will renew old, maturing bonds at a higher coupon rate. Doing so doesn’t technically add to the nation’s debt—if the government previously had $1,000 worth of 10-year bonds outstanding, it still has $1,000 worth of 10-year bonds outstanding. But investors would pay more to hold a bond paying $7 a year than a bond paying $3.50, so guaranteeing a higher interest rate would allow the Treasury to raise more money.
Are those high interest rates, costing the government more money, a problem? Technically no. Credit limit applies Face value of outstanding central government debt ($1,000 in our example), not future promises to pay interest.
And the idea might come in a slightly different flavor. The government may issue bonds that pay regular coupons, but they never repay the principal or permanent bonds. People buy them for long-term cash flow and they don’t add to the principal amount owed on the loan.
The premium bond idea has received support from some big names. Economic commentator Matthew Yglesias brought it In January, Bloomberg columnist Matt Levine was written For that, The New York Times columnist and Nobel-winning economist Paul Krugman made a case this week.
But even supporters of premium bonds acknowledge that it could face legal challenges or damage America’s reputation in the eyes of investors. In addition, their design and release must happen quickly.
“In general, the Treasury makes changes slowly, consulting a lot of bond market participants and announcing bids in advance,” said Joseph E. Gagnon said the government should offer a discount.
But, he added, it’s “definitely throttling,” and “he would argue that it’s better than not paying workers or retirees at all.”
Although the premium bond idea may come in different packaging, it has a lot in common with the currency idea. Any plan would exploit a loophole to add to government coffers without actually raising the debt ceiling. Because both are seen as gimmicks, it may be difficult for one to become reality.
Of all the options the government could use to get past the debt ceiling unilaterally, “in our view they are the least likely,” said Chris Kruger, policy analyst at TD Cowen.
But a solution that hinges on the 14th Amendment could garner broad support, Mr. Kruger said. It invokes a provision in the Constitution that says the validity of public debt cannot be questioned.
Some legal scholars argue that the language violates the statutory debt limit, which currently reduces the federal debt to $31.4 trillion. The idea is that the government’s obligation to pay its debt would violate the debt ceiling rules – so the debt ceiling could be ignored.
It may not be a perfect solution: The move would attract an immediate court challenge and sow uncertainty in the bond market, even its proponents admit. However, some White House officials have explored the option.