So!
You may remember August of 2011 where the Republican party held a gun to the head of the world economy. No?
Well, you do now.
First a little background on what the Debt Ceiling is:
The United States constitution
gives the Congress the power to take on debt and write budgets. In the old days, Congress had to vote on each loan but to streamline the process the debt ceiling was created in 1917 by the
Second Liberty Bond Act, in order to raise money for the first world war. Shortly before World War 2, the Public Debt Acts of 1939 and 1941 created the debt ceiling that we know and hate today.
The resulting
Budget Control Act established a bi-partisan, bi-cameral super committee was meant to find Real Cuts and Real Savings to protect our precious children's economic future. Long story short, they failed miserably and triggered what is known as "sequestration" or, a massive an unnecessary experiment in austerity that will send us back into a recession quicker than you can say
Trillion Dollar Coin.
Fast forward through the election and at the end of next month, the US will hit the ceiling (technically we already did, but money is fungible) and thanks to the fiscal cliff deal sequestration is also set to go off on March 1st.
What Happens If We Do Nothing?
We hit the debt ceiling and default on our debt, triggering a massive economic shock that will damage the world's economy at least as much as a limited nuclear exchange in Europe would.
At the same time, the US government would automatically slash $500 Billion dollars from military and defense spending (read: firing servicemembers) and $500 Billion dollars from "discretionary spending" (read: fuck the poor, let's eat grandma).
Shit, That Sounds Bad! What Are Our Options?
There are a few!
The sanest would be a clean repeal of sequestration and a clean raise of the debt ceiling, but let's be honest: that ain't gonna happen.
The second sanest is that,
using a trick of the law that lets the treasury mint platinum coins of any denomination, we just bring out a trillion dollar coin, stick it in an account, and pretend that this all makes sense. But wouldn't that create inflation?! No, and here's Krugman with
why.
The third sanest is a constitutional crisis wherein the president cites the 14th Amendment, which says that the US will honor its debts, and tells the treasury to just keep swimming. This is tenuous ground at best and basically no one involved has signaled that they're willing to do it.
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... man what. Isn't this the "print more money" solution which fucks the value of the currency?
No, it doesn't go into circulation.
In short, no.
Because it never enters circulation, it only creates as much inflation as taking out the loans would create anyway. @Ronya has a post that I'm too lazy to dig for in the other thread.
Debt ceilings are a sensible political instrument that exists in actually-existing non-crazy countries; Germany has it by legislation and Switzerland by constitutional amendment. However, a key feature of these is that they have sensible designated outcomes for what happens when no ceiling-compatible budget is passed, and electoral bodies are simply incentivized in some way to respect the limit (by, for instance, having another body get to design the budget instead if their own budget goes over).
Debt can't go above x on paper.
Mint coin worth 1 trillion.
Federal Reserve "buys" coin from Treasury.
Debt, (on paper) is now x - 1 trillion.
We can now borrow again.
Good call, I got distracted by my landlord for a minute.
Links added in now.
I had a hard time not imagining he had a vest of dynamite strapped on under his suitcoat.
Wait, so the coin isn't a coin in the sense of being currency, it's something that is bought so that...
No, wait, that makes no sense because it'd have to have some actual currency value...
I... am probably going to stay out of this, it sounds way too big for me to understand.
(Correct me if I'm wrong someone ohgodpleasehelp)
US Treasury mints trillion dollar coin.
Deposits coin for a trillion dollars with the Federal Reserve.
Federal Reserve buys a trillion dollars of bonds.
US Treasury is now a trillion dollars below the debt ceiling and can keep borrowing to refinance.
US Fed is revenue neutral (bought enough to offset the inflation of introducing a trillion of new currency).
Net result: US Treasury can issue a trillion of new debt, at least until the Fed runs out of bonds to buy back.
I could be wrong, but this is predicated on the understanding that the United States is wealthy enough only to have to do this once--or rather, to do it and immediately undo the practical effects to stave off default.
No one's suggesting that supercoins be issued indefinitely into the future. I think.
Okay, that's precisely the info I needed for all this to make sense in my head. So how is it that such status has been granted to the Fed?
not quite; it's predicated on the specific understanding that the Federal Reserve has tons and tons of assets to sell
If we do it now, hell I think even if we don't, Congress will pass a law limiting the ability to mint commemorative coins to X denomination and Obama will have to sign it into law lest he look like he's taking a powergrab.
The flipside of that is that Congress will also be shamed into fixing the debt ceiling permanently.
They wouldn't need to
Doing it once would effectively neuter it as an option for holding the nation hostage, making congress less likely to hold this shit show in the future
Right, it's backed by the sheer wealth that can be called upon. Makes sense.
RONPAUL
That's the thing that's weirding me out. If I understand it right, the government's collateral for loans is given to itself, it's like a weird loop that barely makes sense.
For an even bigger WTF consider the fact that the biggest holder of American sovereign debt is America.
No this part I was made aware of already, back when discussions about "CHINA IS GONNA OWN THE USA" crap were going on.
federal reserve act 1977 solidified the federal reserve's independent authority over monetary aggregates, although the 1913 act already gave it full authority over the issue of US (paper) legal tender, taking this power away from the Treasury. The engraving bureau under the Treasury prints the notes, but only the Fed issues them - in comparison, the mint under the Treasury makes coins and the Treasury still issues them.
in essence the Fed can do pretty much whatever it wants, as long it is vaguely pursuing its dual mandate, of price stability and full employment. Playing as the Treasury's pass-through doesn't threaten this ability. arguably it serves it, because debt default would be pretty dang destructive.
How much more deficit reduction do we need? CBPP says $1.4 trillion.
The Fed has a dual mandate. They have the ability to purchase bonds and assests per that responsibility.
hmm
no, you see, the Treasury gets to administer the legislated budget. It gets to say: you own this, you own that, to the assorted departments. the Federal Reserve is a bank. It can't take away the stuff that depositors put there. It's not selling "the government"'s stuff. It's selling its own stuff, the vast hoard of assets which it owns for the specific purpose of pursuing its mandate. the infamous Federal Reserve balance sheet which is where all that quantitative-easing stuff sits.
Apparently you aren't familiar with the modern incarnation of Congress.
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that part is outside my area of expertise, really
I'm not sure I follow. How would this empower them? Did you mean disempower?
He should just flat out announce, "If Congress passes this bill, I will sign it - provided it also includes a provision that permanently eliminates the debt ceiling. If not, I will veto the shit out of it, then I'll walk over to the Mint and run off not one, not two, but ten thousand trillion dollar coins. And then I'll give em to Joe Biden and ask him to walk down the streets of Baltimore, makin' it rain like Clay Davis.
"Cause fuck y'all."
as a matter of macroeconomic policy, the Fed and the Treasury could keep it up for as long as the Fed has assets to sell. Once the Fed has run out, then the Treasury will have to monetize debt to keep it up, which is liable to be just as destructive as wholesale default. the Fed has lots, though.
Ask him!
Hey, for that matter, what are they saying will happen with default anyway?
Mint the coin, and we'll deal with it after.
I'm still waiting for a plausible scenario where four nuclear missiles are neatly fired at four cities without the requirement that multiple European nations tearing apart a massive economic entity, and then everything stops. I have no doubt the default would be incredibly damaging, both as it happened and as it became apparent that there was no eleventh hour option, but the deaths of tens of millions of both producers and consumers combined the actual physical destruction of a large chunk of the world economy seems more immediately severe.
Now, as to the long term ramifications, personally I think this gets into the sort of highest-government economic deal making that is extremely difficult to speculate about. But if nothing could be done, which might be the cae, it could indeed be much worse, especially since it wouldn't be accompanied by the growth through investment in rebuilding accompanied by war.
I'm going to assume the Reserve isn't in any position to sell aircraft carriers or parts of the Midwest--but to promise actual capital. And we're talking about a default, which would lead to a exponential decline in the value of that ability both with the damage to the economy and to of a lack of trust for the aforementioned reasons.
Very little. The rhetoric I've heard is along the lines of 'we must deal with this destructive spending' and seeks to imply that the spending is just as bad as a default.
I suspect the reality is that the people who genuinely want this are in that situation I found myself when 9/11 happened: it just didn't hit me that this was a huge disaster with lots of real people dying - not immediately. Instead I woke up, got told a terror attack was happening and was excited at exciting things happenings.
And apparently I wasn't alone since the zeitgeist which took hold of pretty much the entire western world after that was just nuts in the same way - some weird assumption that all these wars were going to improve things forever.
You can wait as long as you like, a limited nuclear exchange does not necessitate a world war.
A default of American debt means the collapse of the dollar, a global depression at least as deep as the 1930s, and a rush to find a replacement world currency which does not currently exist.
Not to mention the likely military conflicts that would arise from this crisis.
I know it is a favorite passtime of yours to try to undercut the idea of American hegemony, but the facts aren't with you here.
Or you're being far too caught up in the logistics of nuclear war.