The Simple SCOTUS-Proof Solution to Debt-Limit Blackmail

Treasury has full statutory authority to issue high-rate and interest-only bonds. Just do it.

To my knowledge, the obvious bulletproof solution to the debt-ceiling blackmail isn’t even being discussed in the White House. Not publicly, at least. And it’s gotten just a few words in passing, for example, in The Washington Post. It’s gotten some play among the econo-finance punditocracy (below), but that’s about it.

I first had this Aha! realization exactly a decade ago, courtesy of Dean Baker. If Treasury today issued $1,000 bonds paying 8% or 10% interest, at whatever price the market’s willing to pay, it gets a lot more than $1,000. But the “national debt” only increases by $1,000, the “face value” of the bonds. Treasury could even issue interest-only bonds with no principal payback at the end, with a face value of zero. The receipts from those bond sales would be pure seigniorage. The bonds could be fixed-duration or perpetual (“consols”), whatever; this works for any duration.

Money to pay the bills, without increasing the national debt. It could make the debt-limit statute immaterial and moot, forever.

Don’t yell at me. This is how the national debt is calculated, by law. The law is also crystal clear on Treasury’s authority to issue bonds (or bills or notes) at any face value or interest rate it thinks best, and with pretty much any conditions attached.

The key statutes are 31 U.S. Code § 3121, 3101, 3102, other links therein. The plain-English language is completely unambiguous. Sure, we know right-wingers are perfectly happy to file frivolous, groundless suits that the courts regularly throw out or simply refuse to hear, and it seems likely they’d file those suits here — with predictable results.

Contra Paul Krugman, this is not a “gadget.” It’s Treasury doing its job. It’s hard to imagine how a legal challenge could even get close to the Supreme Court. That’s something we desperately want to avoid, for obvious reasons that I don’t think I need to detail here. So the “just keep selling bonds and let ’em sue us,” 14th Amendment approach, is also something we should avoid.

Reacting to a Matt Yglesias post, the great Matt Levine (similarly here and here), has done the best writeup of the arithmetic and mechanisms (unfortunately it’s gated).

Levine only raises one specific concern: bond buyers might discount the bonds’ value a bit when purchasing (for a while?) — so they’d pay a slightly lower price/higher yield. And lenders might discount the bonds some (for a while) as collateral. But that’s just a matter of degree. Treasury is still getting money to pay the bills, that doesn’t add to the national debt.

Then Levine shares his (uncharacteristically unsupported) opinions:

As an actual thing for the US Treasury to do, I think it is obviously very bad; the US Treasury market, perhaps the most important financial market in the world, should not be run on accounting gimmicks. Actually doing this would be terrible!

Again, it’s not a gimmick; it’s just Treasury doing its job. And the bond markets are deeply expert at managing debt instruments with a vast array of different terms and conditions. They’d do fine.

But in any case, Levine then acknowledges the obvious alternative: default courtesy of Kevin McCarthy & Co. And he concludes:

It’s worth being ready to do it.

Or even better, just doing it right now.

An extra-special bonus: this would educate the press, the public, and the punditocracy in a very clear lesson: “the national debt” is a quite arbitrary number indeed, just a function of the interest rates at which Treasury bonds happen to have been issued over past years and decades — which was and is always at the discretion of the Treasury Secretary. Janet Yellen, are you listening?