The face amount of obligations issued under this chapter and the face amount of obligations whose principal and interest are guaranteed by the United States Government (except guaranteed obligations held by the Secretary of the Treasury) may not be more than $14,294,000,000,000, outstanding at one time, subject to changes periodically made in that amount as provided by law through the congressional budget process described in Rule XLIX [1] of the Rules of the House of Representatives or as provided by section 3101A or otherwise.

31 U.S.C. § 3101(b)[1]

[OK, this is Larry and I’m back again to discuss yet another way our government might fall apart. You’re familiar, no doubt with what happens when Congress fails to appropriate money to fund one or more government activities. People have to go home. It was decided way back in the Carter Administration[2] that government employees who went to work when there were no appropriations, but weren’t “essential” to protect life or property, quite likely were committing a criminal act. What’s the crime? Why, violating the “Anti-Deficiency Act,[3]” i.e., the statute that prohibits federal employees from obligating the government to spend money when they don’t have the authority to do so. That’s what “appropriations” are: the authority to financially obligate the government.

You see, when federal employees go to work they’re automatically entitled to be paid for their time. So just by showing up they obligate the government to pay them, even when the government has no authority – no appropriations -to do so. Well, couldn’t an employee offer to work for free for a day or two, just to keep things running? No, says our government; federal employees have no authority to waive their right to be paid.[4] So they have to stay home, unless they protect life or property.

So when was that last a problem? No doubt you remember: It was 4 years ago, back when we faced a “fiscal cliff.” The “cliff” was that there were no appropriations for a time to support some government operations, and some government folks had to stay home. You’ll be happy to know that we don’t have the same situation this month. Appropriations are in place, for the most part[5]; but now we have a different problem. The problem is, when the bills come due, we [the United States] may not have the cash to pay them.]

Burgeoning Debt

How could that be? Well, because the U.S. runs a deficit every year; while it collects lots of taxes and has other revenues, it doesn’t collect enough to pay all the bills. The U.S. funds its yearly deficit by borrowing on the Treasury market. Unfortunately Congress has limited the total amount the U.S. can borrow; you can find that in the quote that begins this piece; and, once again, we’re approaching the ceiling.[6] By the way, the current ceiling isn’t $14.3 trillion; it’s higher, due to subsequent adjustments. The Treasury keeps track of these sorts of things.[7]

So what is Congress to do? Raise it again? And if so, will there ever be a point at which we can stop doing that?[8] What happens if eventually there’s just too much debt out there? When will we know that’s the case?

That’s what the argument is about. The issue was kicked over to the “Government Accountability Office” back in 2010 which, of course, duly issued a report. The GAO’s basic opinion was that the debt limit doesn’t restrict Congress’ ability to authorize spending at any level. Instead, it restricts the Treasury’s ability to pay the inevitable bills.[9] That is, it creates a series of crises followed by successive increases in the ceiling. “Meanwhile,” GAO said, its “long-term simulations show that absent policy changes, federal debt will increase continually over the next several decades.”[10]

Debt Default

So here we are, approaching the ceiling again. Perhaps it’s time to start thinking about the unthinkable. What happens if the U.S. simply doesn’t pay all of its bills? Well, that’s not a new idea. The Treasury is adamantly opposed to that kind of thing. It says: “Failing to increase the debt limit would have catastrophic economic consequences. It would cause the government to default on its legal obligations – an unprecedented event in American history. That would precipitate another financial crisis and threaten the jobs and savings of everyday Americans – putting the United States right back in a deep economic hole, just as the country is recovering from the 2008 recession.”[11]

That’s the current position of the Trump Administration, but it’s not very much different from that of its predecessors. Why do all these people reach the same conclusion? Well, at bottom it’s because they’re convinced that, if the U.S. defaults an any debt payments, of any type, that ultimately would reflect on our national credit rating – which currently is very good – causing it to be downgraded, and thereby raise the interest rate we might have to pay for future borrowings.

That wouldn’t be a problem, I suppose, if we ran a budget surplus; but we don’t; we need to borrow lots every year; and rising interest rates will simply add to the amount we borrow. I don’t know if that would lead to “another financial crisis;” it’s said that we’ve never defaulted before, so who really knows? But rising interest rates can’t be a good thing for any debtor who has to go back to his [or her] lenders.

Prioritize Payments?

So are there other options? Well, Congress thought of some. There’s the notion, for example, that perhaps we ought to stick with the current debt limit, and simply prioritize our payments according to what’s important to us. Like the middle-class person strapped for cash, we might skip the electric bill for a month and pay the car loan, or vice versa. In truth a proposal sort of like this passed the House a couple of years ago[12]. [As near as I can tell, it never made it through the Senate.] It basically exempted from the debt ceiling all principle and interest payments due on bonds (a) held by the public, or by (b) the Social Security Trust Funds. All other payments would be curtailed.[13]

The bill is interesting – especially to someone on Social Security – but all such attempts to prioritize debt payments were [and apparently are] opposed by the Treasury. In May of 2011 it said: “Adopting a policy that payments to investors should take precedence over other U.S. legal obligations would merely be default by another name, since the world would recognize it as a failure by the United States to stand behind its commitments.”[14] No doubt the same could be said about an attempt to give preference to payments under Social Security.

Coin More Money

Or perhaps Congress already has resolved the problem a different way. Four years ago we pointed out that, in addition to appropriating funds and incurring debt, Congress has the power to coin money. And, according to The Washington Post, Congress may have given one bureaucrat the power to solve our problem with the debt limit.[15]

It seems that the Treasury Secretary has authority “notwithstanding any other provision of law,” to “mint and issue platinum coins in such quantity and of such variety as the Secretary determines to be appropriate.”[16] So, problem solved: All the Treasury has to do is mint up a few such coins in the $ 1 trillion denomination, deposit them wherever it keeps valuables (perhaps in Fort Knox[17]), and offset that amount from our outstanding debt. Presto! Federal net debt lowered well below the statutory ceiling.

We’ve said this before, by the way, but not seriously. Other countries have tried to print money to get out of a fix, but haven’t had very good results.[18] No doubt we’d have the same experience if we did the same thing.

Conclusion

Sometimes I wonder if, centuries from now, future archeologists, combing through the rubble of the Great American Empire, will stop to wonder what happened, why that Great Thing eventually collapsed. Will they find we had a deadly plague, or a series of them; or a great famine, due to global warming; or a series of violent, destructive wars? Or will it be something much simpler than that. Will they find, perhaps, that we failed because we had an accounting problem, and just couldn’t control our money?

I have no idea. What do you think?

 

 

 

[1] This language appears in Title 31, Money and Finance, Subchapter III, Financial  Management, Chapter 31, Public Debt. The official online version of this part of the U.S. Code is available from the Government Publishing Office at https://www.gpo.gov/fdsys/pkg/USCODE-2010-title31/pdf/USCODE-2010-title31-subtitleIII.pdf    If you would rather try an unofficial, but reliable version, try the Cornell Law School, at https://www.law.cornell.edu/uscode/text/31/3101

[2] James Earl Carter was President of these United States from January, 1977 through January, 1981. See the Wikipedia entry at https://en.wikipedia.org/wiki/Jimmy_Carter  . That’s also when the Iranians threw out their Shah and went with the theocracy they have today. Some say the current government of Iran doesn’t like us because we supported the Shah, and sold him lots of weapons, and perhaps helped him gain power in the first place.  This blog is not about that.

[3] For a non-technical discussion, see Time, Nicks, The Man Who Invented the Government Shutdown (Oct. 09, 2013), available at http://swampland.time.com/2013/10/09/the-man-who-created-the-government-shutdown/

[4] Id. We’re looking for a copy of the old Civiletti opinion. If we find it, we’ll publish it in a later blog.

[5] Actually, that’s what I think, but I haven’t researched the matter, so I’m not offering an opinion as to whether there are appropriations currently in place to cover all government functions, or whether they are adequate for their untended purposes. That’s not what we’re discussing today.

[6] See  GAO 11-203, Debt Limit, Delays Create Debt Management Challenges and Increase Uncertainty in the Treasury Market (February 11, 2011), available at http://www.gao.gov/products/GAO-11-203 . This will be cited as “GAO -11-203 at __.”

[7] See Treasury, Debt Limit, at https://www.treasury.gov/initiatives/Pages/debtlimit.aspx ; Treasury, Monthly Statement of The Public Debt of the United States (March 31, 2017), at https://www.treasurydirect.gov/govt/reports/pd/mspd/2017/opds032017.pdf . Today the authorized debt limit, for publicly held securities and intergovernmental securities, is close to $20 trillion. The limit on publicly held debt remains at around $14.4 trillion.

[8] See GAO -11-203 at What GAO Found:The debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a limit on the ability to pay obligations already incurred.”

[9] See GAO-11-203 at p. 1: “The debt limit does not restrict Congress’ ability to enact spending and revenue legislation that affect the level of debt or otherwise constrain fiscal policy; it restricts the Department of the Treasury’s … authority to borrow to finance the decisions enacted by the Congress and the President.”

[10] Id.

[11] See U.S. Treasury, Debt Limit, Myth v. Fact, available at https://www.treasury.gov/initiatives/Documents/Debt%20Limit%20Myth%20v%20Fact%20FINAL.pdf

[12] See House Report No. 113-48, Full Faith and Credit Act, available at https://www.congress.gov/congressional-report/113th-congress/house-report/48/1

[13] Id. at p. 4: “The provision provides that in the event the debt of the United States Government reaches the statutory limit, the Treasury Secretary shall issue debt to the extent necessary to pay principal and interest on certain obligations as defined. Obligations for which debt shall be issued are limited to those obligations held by the public or the Social Security Trust Funds. Obligations issued pursuant to this authority are exempt from the statutory debt limit. Section 2 also requires a weekly report from the Treasury Secretary if authority under subsection 2(a) is exercised that accounts for obligations due and amounts issued.”

[14] See n. 11.

[15]See The Washington Post, Wonkblog, Matthews, Michael Castle: Unsuspecting godfather of the $1 trillion coin solution (2013/01/04), at  http://www.washingtonpost.com/blogs/wonkblog/wp/2013/01/04/michael-castle-unsuspecting-godfather-of-the-1-trillion-coin-solution/?wpisrc=nl_showdown

[16] Actually, I wasn’t able to verify this precise quote, but I found something similar at 31 U.S.C. §5112(k): “The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.” You can find 31 U.S.C. §5112 at https://www.gpo.gov/fdsys/pkg/USCODE-2011-title31/pdf/USCODE-2011-title31-subtitleIV-chap51-subchapII-sec5112.pdf

[17] For more about the Treasury’s bullion depository at Fort Knox, go to Wikipedia and search “United States Bullion Depository,” or simply click here: http://en.wikipedia.org/wiki/United_States_Bullion_Depository

[18] See CNN World, Zimbabwe to print first $100 trillion note (January 16, 2009), at http://articles.cnn.com/2009-01-16/world/zimbawe.currency_1_zimbabwe-dollar-south-african-rand-dollar-note?_s=PM:WORLD   See also the blog of 11/12/2010, The Wages of Hyperinflation, at http://elementalzoo.typepad.com/elemental-zoo/2010/11/index.html . That one deals with hyperinflation in Weimar Germany.

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