The trillion dollar coin

The weirdest idea for solving the debt crisis comes from Ezra Klein of the Washington Post:

Obama could always just solve the crisis with a pair of magical platinum coins. Sure, that sounds preposterous, but Yale’s Jack Balkin argues that this is actually a perfectly legal strategy. Here’s the logic: Under law, there’s a limit to how much paper money the United States can circulate at any one time, and there are rules that limit how many gold, silver and copper coins the Treasury can mint. But the Treasury is explicitly allowed to mint however many platinum coins it wants and can assign them whatever value it pleases.

So the Mint makes a pair of trillion-dollar platinum coins. The president orders the coins to be deposited at the Federal Reserve. The Federal Reserve moves this money into Treasury’s accounts. And just like that, Treasury suddenly has an extra $2 trillion to pay off its obligations in the near term without issuing new debt. If the Fed was worried about all that newly created money being pumped into circulation, it could always counteract the inflationary effects by selling off the $2 trillion in securities it owns from quantitative easing (thereby taking an equivalent amount of money back out of the economy). Problem solved. Right?

Well, sort of. The interesting thing about the platinum option, as it turns out, is that it actually seems to be on a firmer legal footing than the 14th Amendment approach. The law very clearly states that the Treasury Secretary can mint these platinum coins. He could even adorn them with the face of House Speaker John Boehner (R-Ohio) if he fancied. The trouble, of course, is the politics. Does Obama stage a press conference where he holds up the two large coins and announces what he’s doing? It’d be hard to see how he could do that with a straight face. (When I tried calling various market observers to get a sense of how Wall Street might react, responses ranged from “I don’t really want to talk about this” to actual laughter.)

via Can a giant platinum coin save our credit? – Ezra Klein – The Washington Post.

The two debt-reduction plans

So House Majority Leader John Boehner has a debt reduction plan on the table.  It is competing with Senate Majority Leader Harry Reid’s plan.  (Notice how both sides are cutting President Obama out of the discussion.)  Both plans cut spending by $1.2 trillion.  Neither plan involves a tax increase.  In fact, the two plans are extremely similar.  Philip Klein gives us a useful comparison:

Similarities:

– Both plans claim to reduce discretionary spending by $1.2 trillion.

–Both plans create a joint, bipartisan, Congressional committee to find future savings.

– Neither plan includes specific entitlement reform.

–Neither plan includes specific tax increases.

Differences:

– Reid’s plan wants to raise the debt ceiling all in one chunk (and boosts the claimed deficit reduction number by relying on savings from the expected wind down of the wars in Iraq and Afghanistan), but Boehner it raised in two parts.

– While both plans endorse a joint committee, the Boehner plan makes the second debt limit increase contingent on Congress passing $1.8 trillion in additional deficit-reduction based on its recommendations.

– Boehner plan would ensure a vote in both chambers on a Balanced Budget Amendment.

– Boehner proposes caps to future spending.

Possibilities for compromise:

– It would be easy for Reid to allow a vote on the Balanced Budget Amendment.

– The differences over whether the debt limit increase should be short-term or last through the 2012 election is not an ideological-based disagreement, so it seems either side could give way on that one.

– Depending on the level of the spending cap, there may be some compromise there.

via Boehner and Reid plans aren’t that different: a comparison | Philip Klein | Beltway Confidential | Washington Examiner.

And yet, for all of the similarities, both sides are still at each other’s throats. Not only that, Boehner’s own party is in revolt against his plan.   I’m not sure why.  Surely the Republicans are getting what they want, over a trillion dollars in cuts and no new taxes.  The main issue now is political:   Reid is proposing a two year package, tiding things over until after the 2012 elections, while Boehner wants to go through all of this again in a year.

Meanwhile, the country faces default and probably worldwide economic collapse if the debt ceiling isn’t raised by August 2.

Under President Clinton, the ascendant Republicans  in Congress shut down the government, sparking a popular backlash that re-elected the unpopular president.  I suspect the same thing will happen again:  Today’s ascendant Republicans, giddy with having taken the House of Representatives, will show themselves willing to shut down the economy, sparking a popular backlash that will re-elect President Obama.

The McConnell plan

It’s hard to  decipher what Mitch McConnell’s plan to deal with the debt ceiling even is, if you just go by the vague news reports and the wildly opposed or enthusiastic descriptions of it by both advocates and foes, both of whom exist among both Republicans and Democrats.  Essentially, as I understand it, McConnell’s plan is for Congress to pass a resolution that will put the onus of requesting debt hikes, which must be accompanied by spending cuts, onto the President.  Here is a relatively lucid explanation of what it is:

The McConnell approach is convoluted because it is intended to allow Republicans to avoid bringing down the U.S. economy without having to cast politically unpopular votes to raise the debt ceiling. Mr. McConnell proposes a series of maneuvers that would end up authorizing a $2.5 trillion increase in the debt limit, enough to take the country past the 2012 election. He contemplates that President Obama will seek an increase in three installments — $700 billion, $900 billion and $900 billion. Congress would have a chance to vote against each of these. The president would, presumably, veto those resolutions of disapproval and, presumably, enough Democrats would stand by him to uphold the vetoes.

Meanwhile, the president would have to specify — although he wouldn’t be required to implement — spending cuts equivalent to the amount of increase requested in the debt ceiling. It’s not hard to imagine Republicans putting this list of cuts to good political use. However, the political sting is softened by the fact that Senate Majority Leader Harry Reid would not need the votes of the most endangered members of his caucus to sustain the president’s vetoes, which may explain some of his expressions of interest in the arrangement.

Here is how conservative blogger Jennifer Rubin explains the measure and the controversies:

If you go onto Twitter or check some Web sites (right and left) you will find loads of chatter about the McConnell debt disapproval plan. Most of it is wrong. Members of the chattering class are so anxious to chatter that they feel compelled to do so without understanding the subject matter at hand. Throw in some bad faith (certain right-wing bloggers would declare the GOP leadership traitors if they proposed only $4 trillion in cuts and got President Obama to decline to run for reelection), add in some liberal suspicion (warranted since this is not the first time that Senate Minority Leader Mitch McConnell (R-Ky.) has eaten their lunch), and presto: You get some of the worst “reporting” in recent memory.

The concept isn’t that hard to understand. 1. McConnell had enough of the phony White House talks. The White House offered a paltry $2 billion in actual, immediate cuts. 2. McConnell gave a speech to make clear that wasn’t enough and that the debt limit would be raised only with real cuts and without tax hikes. 3. McConnell could sit back and wait for default. 4. But he comes up with a mechanism to force Obama to put up cuts, send them to Congress and face “default” if the president’s cuts don’t get through. 5. In the process he makes 34 Democratic senators vote over and over again on cuts. (The sound you hear in the background is the conga line at the Senate Republican Committee headquarters.)

There are no tax increases in the plan. The onus is on the president to send a request for a debt-ceiling increase and the cuts to go along with it. If he doesn’t do it or if the Congress disapproves of what he sends up (and sustains a veto) the debt ceiling remains in place. But the Senate Democrats will have the power to sustain a veto (and thereby allow phony cuts to be used to raise the debt ceiling), right? Which 34 senators exactly are going to do this? Certainly not the ones in unsafe seats with voters clamoring for real spending cuts.

The critics who dimly understand the plan forget that the alternatives are limited. What are the alternatives? Default. Or accept the tax hike offer from the White House. Or maybe Obama will cave. McConnell is more than happy to keep on trying to get rid of the tax hikes and get the White House to cough up real spending cuts.

But if there is no deal (grand or otherwise) then the default will not be on the shoulders of the Republicans. McConnell is providing them with a backstop to avoid default.

via McConnell’s plan confuses the chattering class – Right Turn – The Washington Post.

The plan gives up on trying to get spending cuts without tax hikes from the President, but it also attempts a kind of political jui  jitzu, by which Republicans will be put in the position of opposing higher debt and Democrats will shoulder all of the blame.   Indeed, it seems, as things now stand, that these negotiations and every possible outcome will make the Republicans look bad.  If the compromises go through, they will be blamed for cutting spending on popular programs, such as Medicare, while also being blamed for obstructionist tactics that put the country on the edge of default.  McConnell would seem to get the Republicans out of that mess, but now he is being accused of blowing the chance to cut spending and caving in to the Democrats, who, suspiciously, are voicing support for the plan.

What is your analysis?

National debt impasse

So President Obama offered $4 trillion in budgetary cuts if the Republicans would accept a tax increase on the higher brackets.  House Speaker Boehner rejected increasing anyone’s taxes, indicating that he would accept a $ 2.4 trillion trim in cuts alone.

Talks between President Obama and congressional Republicans grew increasingly contentious on Monday, as GOP leaders flatly rejected his call to raise taxes on the wealthy as part of a bipartisan agreement to restrain the nation’s mounting debt.

Dueling news conferences by Obama and House Speaker John A. Boehner (R-Ohio) served as a testy prelude to an afternoon bargaining session that only emphasized the partisan divide, according to people on both sides with knowledge of the closed-door discussions.

During the meeting, Obama challenged Boehner to buck the anti-tax hard-liners in his party, who, the president suggested, are blocking the path to a landmark compromise to reduce borrowing by as much as $4 trillion over the next decade. Boehner and House Majority Leader Eric Cantor (R-Va.) responded by urging Democrats to settle for a more modest reductions-only deal that would save $2.4 trillion but would not touch tax breaks for the nation’s richest households.

In addition to major cuts to domestic agencies, the House GOP proposal calls for slicing about $250 billion from Medicare over the next decade by asking well-off seniors to pay more for health coverage, placing new restrictions on Medigap policies and putting in place new co-payments and cost-sharing provisions for home health care, among other changes. Those reductions would come on top of about $500 billion in Medicare savings previously enacted as part of Obama’s overhaul of the health-care system — cuts Republicans denounced during last fall’s midterm campaign.

via Debt talks between Obama, Republican leaders grow more contentious – The Washington Post.

Isn’t it better to have a $4 trillion cut than a $2.4 trillion cut?  And wouldn’t a tax increase cut the deficit even more, on top of that?  Isn’t the deficit such a huge problem that we need to attack it both by cutting spending and by increasing revenues somehow?  Given that Democrats don’t want to cut entitlements and Republicans don’t want to increase taxes, do you see any way out of this impasse?

The National Debt and the Constitution

As we wrestle with the national debt and as Congress debates over whether to raise the debt limit or risk default, we should consider what the Constitution says about the issue.  First, Congress does have the right to borrow money:

‘The Congress shall have power … To borrow money on the credit of the United States.’  Article I, Section 8

But read on to the 14th Amendment and you find this:

‘The validity of the public debt of the United States … shall not be questioned.’  14th Amendment, Section 4

The 14th Amendment deals with the wreckage of the Civil War, giving citizenship to former slaves by virtue of their having been born here (another controversial issue in the immigration debate, though clearly addressed in the Constitution) among other things.  Article 4 repudiated the debt of the Confederacy, but in doing so it affirmed that the United States will always honor its debts.

This was a brilliant addition, serving as the basis for the idea that U.S. bonds are backed by the “full faith and credit” of the United States of America, meaning they are a rock solid investment.  It isn’t just our full faith and credit that backs them but the Constitution itself.  It would be unconstitutional to default on our loans.

But, as some experts are saying now in the midst of the debt ceiling negotiations in Congress, the 14th Amendment would render all of that moot.  There is no need to raise the debt ceiling because the Constitution provides that all debt that we incur must be paid.  The money that our lawmakers are squabbling over has already been spent and has been authorized by statute.  According to the 14th Amendment, that debt has to be honored.

Debt can certainly be too high and need to be controlled.  But the 14th Amendment means that whatever we borrow must be paid back.   According to some attorneys, if the current negotiations to raise the debt ceiling break down, to prevent the country from going into default, the President simply needs to sign an executive order invoking the 14th Amendment and keep borrowing money to pay our obligations, despite what Congress does.

Do you see any flaws in this legal reasoning?

 

see U.S. Constitution Under Siege over Libya, Taxes, Health Care – TIME.

HT:  Jimmy Veith

China dumping U.S. treasuries

What if everyone stops lending the U.S. government money?

China has dropped 97 percent of its holdings in U.S. Treasury bills, decreasing its ownership of the short-term U.S. government securities from a peak of $210.4 billion in May 2009 to $5.69 billion in March 2011, the most recent month reported by the U.S. Treasury.

Treasury bills are securities that mature in one year or less that are sold by the U.S. Treasury Department to fund the nation’s debt.

Mainland Chinese holdings of U.S. Treasury bills are reported in column 9 of the Treasury report linked here.

Until October, the Chinese were generally making up for their decreasing holdings in Treasury bills by increasing their holdings of longer-term U.S. Treasury securities. Thus, until October, China’s overall holdings of U.S. debt continued to increase.

Since October, however, China has also started to divest from longer-term U.S. Treasury securities. Thus, as reported by the Treasury Department, China’s ownership of the U.S. national debt has decreased in each of the last five months on record, including November, December, January, February and March.

via China Has Divested 97 Percent of Its Holdings in U.S. Treasury Bills | CNSnews.com.


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