While raising the US debt ceiling has not gotten as much attention — yet — as the risk of falling off the fiscal cliff, it soon will. The limit will likely be hit by year end. And if Congress fails to raise the borrowing cap, the Treasury would likely run out of money-management options to avoid a default some time in the February.
So what to do? Analyst Chris Krueger at Guggenheim Securities’s Washington Research Group outlines four options. Pay particular attention #4:
1. Traditional Raise. This would involve a straight raise in the debt ceiling without any Congressional strings or new/alternative mechanisms. By using “back of the envelope accounting” the USA burns approximately $100B in debt per month.
2. Raise by Congressional Disapproval. This is the system engineered last summer. Essentially, the Congress passes a motion of disapproval to raise the debt ceiling, Obama vetoes, and the Congress fails to override the veto. Assuming there is not enough votes to override the veto (there are not), the debt ceiling is raised.
3. Constitutional Option. The debt ceiling forcing mechanism could be demolished if Obama invoked the “constitutional option” and unilaterally raised the debt ceiling. The 14th Amendment of the Constitution states the validity of the public debt shall not be questioned. Under this option, Obama would invoke the 14th Amendment and unilaterally raise the debt ceiling – a move that was encouraged by former President Clinton last summer in the height of the debt ceiling stare down. This option would trigger a wave of lawsuits and a likely Supreme Court decision. The biggest problem with going this route would be to – in effect – set up two tranches of Treasuries. Those that are not subject to a legal challenge (issued under the old debt ceiling) and treasuries that are subject to a legal challenge, which would likely trade at a discount.
4. Platinum Coin Option. This is even more theoretical than the Constitutional Option, though some argue that it is a stronger legal option. There are limits on how much paper money the U.S. can circulate and rules that govern coinage on gold, silver, and copper. BUT, the Treasury has broad discretion on coins made from platinum. The theory goes that the U.S. Mint would create a handful of trillion dollar (or more) platinum coins. The President would then order the coins deposited at the Fed, who would then put the coin (s) in the Treasury who now can pay all their bills and a default is removed from the equation. The effects on the currency market and inflation are unclear, to say the least. You would also likely trigger a wave of lawsuits similar to the Constitutional Option and create two tranches of treasuries. Both this option and the Constitutional Option are VERY low probability options
OK, you got me. The platinum coin option is a new one on me. I agree with Krueger that the “effects on the currency market and inflation are unclear, to say the least.” I would rather not find out.