With the summer deadline looming large to avoid a catastrophic default on U.S. debt, the White House and House Republicans are no closer to striking a deal. This week, the White House warned that President Joe Biden would veto a Republican proposal that would lift the debt ceiling into 2024 in exchange for cutting federal spending.
The Congressional Budget Office said Tuesday, April 25 that the Republican proposal would reduce budget deficits by about $4.8 trillion over the next 10 years if implemented. But Democrats have argued for a clean debt ceiling hike to avoid default, reminding Republicans they did so when former President Donald Trump was in office.
The Treasury Department is already taking extraordinary measures to stretch U.S. funds to the summer, now saying a debt default will occur sometime between July and September. Absent congressional bipartisanship to raise the $31.4 trillion debt ceiling before that time, the Treasury is in a tricky spot. But there may be legal options the executive branch can take that bypass Congress and the debt ceiling.
Conflicting constitutional obligations
The Treasury is legally obligated to make payments owed, from Social Security to military pay to debt interest payments. At the same time, Congress holds the power of the purse and orders that Treasury cannot borrow more than the body says to make the necessary payments. Without a debt ceiling hike, Treasury will have to break one of these two conflicting obligations.
“So from a kind of traditional perspective, they have to choose, quote-unquote, the least unconstitutional option,” said Nathan Tankus, research director for the Modern Money Network.
Tankus laid out three ways that Biden could “steamroll” Republicans on the debt ceiling.
- Treasury can break the debt ceiling, determining it is less unconstitutional than defaulting on debt.
- Mint a platinum trillion-dollar coin, whereas Treasury has the authority to mint platinum coins in any denomination.
- Issue low-face-value, high-coupon bonds, a creative accounting proposal that could shuffle around finances.
Would the Fed play ball?
The Federal Reserve acts as the Treasury’s fiscal agent. Many have questioned whether the Fed, which attempts to maintain political independence from administrations, would even participate in some of these proposals.
According to Tankus’ research, which takes him back to an October 2013 conference call with Fed officials, now-Fed Chair Jerome Powell’s comments when he was just a member of the board of governors indicate he would take extraordinary measures, albeit begrudgingly.
Speaking on an idea of buying defaulted Treasury securities, Powell called the concept “loathsome.”
“But I don’t want to say today what I would and wouldn’t do, if we have to actually deal with a catastrophe on this,” he said.
Pressed by then-Fed Chair Ben Bernanke whether he’s willing to accept “loathsome” under certain circumstances, Powell said yes, though he noted the Fed should not publicly disclose what they’d be willing to do until the last minute because he feared it would take pressure off Congress to negotiate a debt ceiling rise.
“They’re being coy because they see their role as essentially compelling Congress and the White House to negotiate with each other,” Tankus said. “They are worried that…they’re going to take steam out of this game of chicken between Republicans and Democrats, and that’s political. They want to stay out of it as much as possible, because they see their independence, their power, as determined by…having both parties think that they are not on, quote-unquote, one side or another.”
What happens if Biden goes nuclear?
A default at any level would be catastrophic for the U.S., certainly resulting in credit downgrades and likely soaring unemployment. Since 1960, elected representatives have acted on the debt ceiling 78 times to avoid default.
Should Biden take a nuclear option, it puts the idea of a debt limit into serious question.
“Anytime they use one of the nuclear options, unless those nuclear options are statutorily closed…it’s fundamentally an end to the debt ceiling crisis,” Tankus said. “And I think that’s a good thing. There’s no actual fiscal benefit that we’re getting through having these recurring debt ceiling crises. And when we want to argue about budget stuff, we should just argue about budget stuff and not have this other dishonest conversation, which involves hostage taking.”
House Republicans are still pursuing their legislation in hopes it’ll frame discussions with Democrats, even if it’s dead on arrival. House Speaker Kevin McCarthy (R-CA) said it was their responsibility to pass the bill and send it to the Senate.
“Without exaggeration, American debt is a ticking time bomb that will detonate unless we take serious, responsible action,” McCarthy said at the New York Stock Exchange last week.
