Debt Ceiling Arm Wrestling Targets Ukraine Spending

The US again is going through its debt ceiling ritual, although there are a few variants on established themes. Rest assured, there will be no voluntary default. As a currency issuer, the US can only choose to default, and the debt ceiling device would be for Congress to be the part that chose to force a default. But Congresscritters personally and via their constituent have far too much at stake to send the the financial markets into a tailspin.

However, a debt ceiling can and often has resulted in spending freezes called shutdowns, the longest of which occurred during the Trump Administration, in a staredown over his southern border wall. Trump eventually blinked and decided to declare a national emergency to bypass the need for Congressional approval.

The important lesson from the Trump and past shutdowns is that voters don’t like them and the party perceived to be responsible usually takes an approval hit. So the real threat is triggering a shutdown, and that is enough to force horsetrading and some spending concessions.

Recall that the Democrats have had opportunities to abolish the debt ceiling and haven’t. It would have gone almost unnoticed had it been included in the early Obama crisis response. Its opponents are correct when they say that the debt ceiling serves to prevent the Administration from spending money already authorized by Congress. And Twitter demonstrates how the two parties are in blame game mode. For instance:

Your “child” is Donald Trump. We are extending the debt ceiling to pay the debts he racked up. https://t.co/3LTRLCw42F

— Rep. Eric Swalwell (@RepSwalwell) January 20, 2023

Sadly, the Democrat message seems to be “Republicans need to own up to Donald Trump profligacy” which still has the effect of perpetuating the Big Lie that government spending is bad. Government spending buys critically important things like bridges and in the old days paid for important social goods like substantial support to public schools. And before neoliberalism sold the myth that corporate spending is good and collective spending is bad, many countries practiced industrial policy. As yours truly has said, we now have industrial policy by default, with pet interest groups getting regulatory and tax breaks that enable them to extract rents. Favored sectors include the military-intelligence complex, real estate, higher education, and health care.

For those who would like to circulate a short-form debunking of debt ceiling misconceptions, Jamie Galbraith has a fine new piece in The Nation that serves nicely. A representative section:

The United States does not borrow in order to have funds to pay its obligations. It pays its obligations by check (or electronic transfer) as specified by law. It then issues bonds so that “investors across the globe” can save a safe US dollar-denominated asset, the Treasury bond, that pays interest, as cash and bank deposits do not.

So the debt ceiling theatrics might not be a bad thing if they fostered more discussion of what national priorities should be. Instead they serve as a device for fiscal conservatives to have a second go at creating conditions to foster more overt or stealthy tax cuts. And Democrats go along because this charade gives them cover to cut politically extremely popular programs like Social Security and Medicare…so privatizers can profit.

We have Janet Yellen in an unseemly manner acting as if the measures she has implemented to handle the US hitting its debt limit are “extraordinary” when in fact they are familiar and have been deployed by numerous times by her predecessors. Disappointingly, the business media, which ought to know better, has has taken up Yellen’s framing.

Treasury’s fancy footwork includes steps like suspending the reinvestment of a fund in the Federal Employees Retirement System Thrift Savings Plan as well as more symbolic measures like closing Federal parks (although it won’t seem symbolic if you had planned to take your family to Yellowstone). Accordingly, Mr. Market yawned. But it is disconcerting to see a Treasury Secretary, whose job includes talking like an adult to investors, instead resorting to language that looks designed to create hysteria, when the actual crunch time is months away, in early June.

As James Carville said, “I would like to come back as the bond market. You can intimidate everybody.” Yellen is making clear she does not understand her place in the finance hierarchy.

Yellen has rejected a proposal much loved by Modern Monetary Theory advocates, that of minting a platinum coin to circumvent the debt ceiling. From the Wall Street Journal:

Treasury Secretary Janet Yellen said the Federal Reserve likely wouldn’t accept a $1 trillion platinum coin if the Biden administration tried to mint one to avoid breaching the debt limit, dismissing an idea that has been floated to circumvent Congress on the issue.

Some Biden administration officials and Democrats on Capitol Hill have discussed the possibility that the Treasury could use an obscure law authorizing platinum coins in the event of a potential default. Under the proposed scheme, the Treasury would mint a $1 trillion coin and deposit it at the Fed, and then draw the money to pay the country’s bills.

Ms. Yellen, who is a former chair of the Fed and meets regularly with current Fed chair Jerome Powell, said the central bank may not go along with such a plan. Fed officials have previously raised concerns about being relied upon to resolve fiscal debates in Congress.

This is an insult to intelligence. First, Yellen admits she hasn’t actually consulted the Fed, she simply assumes they won’t go along. Secondly, and worse, Yellen effectively admits she has not taken a serious look at the relevant legal issues.

Nathan Tankus, in the Financial Times, explained that the Fed as Treasury’s fiscal agent in fact was obligated to accept the coin:

So why wouldn’t the Fed accept the coin? This is not actually a simple question.

The platinum coin would be legal tender when issued, and the Fed is a fiscal agent to the Treasury. Being a fiscal agent means making payments, accepting deposits and providing other payment-related services to the Treasury. Thus, the Fed would appear to be obliged to accept the coin. But there’s one catch: coins are only “issued” and monetised when they are purchased.

As a result, if the Treasury were to try to deposit the coin at the Fed, the Fed could claim they don’t have an obligation to accept it and credit Treasury’s accounts, because it has not yet been “issued”. In other words, the central bank would decide that the round chunk of platinum from the US Mint is not yet a coin. (This makes the catch we cite above more of a Catch-22, as the Fed’s acceptance is what would “issue” it as a coin.)

There are a few important things to notice about this argument. First, it implicitly accepts that it would be legal for the Treasury to mint and seek to deposit the coin. In other words, the idea is that the Fed would interfere with the Treasury making payments and avoiding a default on its debts for non-legal reasons. This, in and of itself, would be an abrogation of the Fed’s obligations as a fiscal agent of the Treasury, a relationship defined by regulations and legislation.

There is also no documented historical precedent for a fiscal agent rejecting the deposit of any coin on this basis, or any other for that matter. As the Second Circuit determined in 2019, “Congress specified the fiscal agency relationship for the purpose of putting the [Federal Reserve Banks] under the direction of the Treasury Department in certain limited circumstances”.

By claiming that the coin has not been issued yet, then refusing to accept it, the Federal Reserve is also interfering with the issuance of a coin. Indeed, that would be the purpose of not accepting it; if Fed officials thought the coin would be successfully issued no matter what, there would be no point to their refusal.

This is important because the Fed does not have the authority to interfere with the Treasury using its congressionally granted powers.

Tankus points out that the Fed could still try to seek an injunction, and nobody likes uncertainty, so the time to legitimate the coin would have been way before any debt ceiling staredown. However, it is noteworthy that the platinum coin proposal has gone mainstream enough that Yellen feels compelled to address it.

Since Yellen, when she was chairman of the Council of Economic Advisers, supported “chained CPI,” which was a way to cut Social Security by having CPI adjustments lag normal-people’s-shopping-basket inflation even further. So one has to wonder if her “lady doth protest too much” is to give the Biden Administration cover for going after Social Security and Medicare because they had to to prevent the Republicans from ending the world as we know it.

An excuse for the heightened spending anxiety is the 20 feral Republicans in the House, who managed to extract considerable procedural concessions to House rules for this term as a condition of approving Kevin McCarthy as House Majority Leader, such as turning the chamber into a Parliamentary system (any member can initiate what amounts to a vote of no confidence) and a promise to return to regular order (budget bills have to be reviewed and aggregated from the 12 relevant committees) and provide for a minimum of 72 hours to review bills before a vote. The professed fear is that this unruly bunch really would tank Treasuries. The reality is they won’t but they could cause other types of trouble.

The untamed 20 actually do have a legitimate beef, which is the $1.7 trillion spending bill passed in the lame duck Congress. Not only did it not go through the normal 12 committee bottom’s up process, so that Congresscritters with nominal expertise had had a look-see at provisions in their committee’s ambit, but it was done back-room style, with only a handful of Congresscritters somewhat appraised as to what was in it. Ukraine was the cover for ramming it through.

The uppity 20, like most of the Republican base, are done with supporting the Ukraine welfare queen, and want to use the debt ceiling fight to re-open the $1.7 trillion package, particularly the Ukraine component. This is an overly dynamic situation, but House Republicans have told McCarthy that they are willing to authorize only 2022 spending levels for 2023. Among other things, that would lead to a 10% cut, or about $75 billion, in the official defense budget (the narrowly defined one; the broader definition includes activities like the intelligence agencies and the Department of Homeland Security). That level is focusing a lot of minds. This demand is even more of a headache for McCarthy since he is a big Ukraine backer and was one of the handful in the room when the $1.7 trillion sausage was made.

So we could have a wilder than usual debt ceiling ride. But if Biden turns out to be seriously weakened by insider efforts to get him to drop his 2024 bid by his classified document scandal, Biden may be less able to stick to his “no negotiation”‘ guns than his posturing suggests.