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Weekend's Most Important Obama Administration Statement Was Not That The Trillion Dollar Coin Idea Was A Nonstarter

13 Jan 2013
Posted by Stan Collender

The U.S. Treasury yesterday dashed the hopes and dreams of many in the blogosphere when it announced that neither it nor the Federal Reserve saw the idea of a $1 trillion platinum coin as a realistic alternative to raising the debt ceiling.

Actually, the Treasury statement was much stronger and more definitive than that. Treasury spokesperson Anthony Coley said "Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt ceiling." In other words, neither the Treasury, which would produce the coin, nor the Fed, which would exchange the coin for cash, are wiling to enter into the transaction. That means that, even if minting and selling the coin is legal, neither the buyer nor the seller are interested in doing the deal. That effectively eliminates the trillion dollar coin option from the debt ceiling debate.

This was not, as some immediately said, the federal budget equivalent of unilateral surrender by the president. To the contrary, the reason the White House decided to stick a fiscal fork in the platinum coin plan, which came just about a month after it said in December it would not use another presumed debt ceiling escape route -- the 14th amendment to the U.S. Constitution -- was explained by Obama Press Secretary Jay Carney later in the day on Saturday. "There are only two options to deal with the debt limit," he said. "Congress can pay its bills or they can fail to act and put the nation into default."

This is one of the toughest hardball negotiating tacts the Obama administration has ever taken with Congress on the budget. The White House effectively is saying to the House and Senate (but primarily to the GOP-controlled House), that not raising the debt ceiling will be judged to be their fault. By refusing even to consider alternatives such as the platinum coin and saying it will not negotiate on the debt ceiling, the administration is putting the onus unambiguously on congressional Republicans and saying they he will not provide them with an out of any kind. He's saying "Raise the debt ceiling or suffer the consequences."

Try to imagine the situation if the White House were decided to use the 14th amendment, the platinum coin or any other creative way to get around the debt ceiling: As soon as it happened, the focus would immediately shift from what Congress refused to do to what the president did. Most of the commentary and debate would be about whether Obama's action was legal and constitutional, there would be constant hearings and likely calls for his impeachment.

But the White House's statements about the 14th amendment and the platinum coin keep the focus laser beam-like on Congress. The only question now is whether the House GOP will play legislative chicken with the increase in the debt ceiling that will be needed some time in late February or will cave when the time comes.

 

I agree 100% with your

I agree 100% with your analysis that this represents Obama operating from a position of greatest strength. The House Republican loonies need to understand that it will be they, and they alone, who will bear full responsibility (and, if the press does its job, blame) for the consequences of failure to pass a clean debt limit increase.


who gets the blame?

"But the White House's statements about the 14th amendment and the platinum coin keep the focus laser beam-like on Congress."

I'm not so sure. The Republican line is that there is enough money coming in to pay the interest on the debt and other "critical" bills, so the nation does not need to go into default as they see it. Whether or not it is possible or practical to make selective payments from available cash is another issue. If the debt ceiling is not increased and the nation goes into default I can see the administration being blamed for not following this selective payment strategy, and causing the default.


If the administration decides

If the administration decides to be selective, some legislated payments will not be made. The failure to make all payments will be effective default. You cant escape from the bind by expecting the Treasury to pick and choose who gets paid.


"If the debt ceiling is not

"If the debt ceiling is not increased and the nation goes into default I can see the administration being blamed for not following this selective payment strategy, and causing the default."

If the press does its job--which is not at all a certainty--then this is not going to happen.


Selective Payment Works

In the event the debt ceiling is reached, some have suggested that the Obama Administration will not be able to select which debts to pay and which to defer, because federal law provides no guidance on this issue. This should be viewed not as a bug, but a feature.

Section 4 of the Fourteenth Amendment to the U.S. Constitution provides that "the validity of the public debt of the United States, authorized by law ... shall not be questioned." While arguments can be made that all federal obligations, including contract claims and entitlements, are public debt, the term "public debt" best describes U.S. bonds. Indeed, the point of Section 4 was to bar the repayment of loans to the Confederate government to finance the Civil War.

I have read that the debt would require a 40% haircut to all federal payees. A default on federal bonds would have catastrophic consequences to world financial markets and would cause the "risk free" federal interest rate to skyrocket. If the Administration prioritizes bond payments, these risks would be minimized.

Of course, if bondholders were receiving 100%, other payees -- Social Security recipients, defense contractors, Medicare providers, Congressional staffers -- would have to take an even bigger haircut. The Administration could issue scrip to the payees, and President Obama could urge outraged payees to contact their Congressman. How long would House Republicans be able to hold out?


Selective Payment

Why would Social Security be impacted under your scenario? The trust fund consists of bonds that would have to be honored, just like any other bond.


Right, until...

"The only question now is [how] the [President] will ...cave when the time comes."

There. Fixed.

Unless you're foolish enough to believe that This Time Is Different.


Could the 14th amendment be

Could the 14th amendment be used to prioritize debt payments on treasuries over other things like SS payments, contractor payments, and federal salaries? After all, as part of the constitution it supersedes the laws establishing other federal payments? ISTM the question is whether other federal obligations are considered "debts" under the constitution. If they are, then the administration CAN use it to ignore the debt limit. (at its political if not legal peril) But it other obligations AREN'T considered "debt" it could be used to prevent default on government bonds.

Of course unlike "no budget" shutdowns, I do not believe that there is any way to prioritize SS benefits ahead of contractor payments and salaries. The congress has already passed laws enabling and obligating the the government to spend the money.


I disagree. The coin should

I disagree. The coin should be minted NOW and kept in reserve. IF the House refuses to lift the debt ceiling, then it can be used. It would prevent the disaster of a default because the House simply refused. Minting it would not force its being used and the onus for its use would fall on the GOP for their refusal to lift the ceiling.


I thought the 14th Amendment

I thought the 14th Amendment was passed to protect payment of Union military pensions after the representatives of the southern states returned to Congress -- and wasn't directly drive by normal debt service. Is there a historian in the house?


"neither the Treasury, which

"neither the Treasury, which would produce the coin, nor the Fed, which would exchange the coin for cash, are wiling to enter into the transaction. That means that, even if minting and selling the coin is legal, neither the buyer nor the seller are interested in doing the deal. That effectively eliminates the trillion dollar coin option from the debt ceiling debate."

That is nothing an executive order by Obama could not change: the Treasury, as part of the executive, can be made to print and deposit the coin; and the Fed can't refuse to accept legal tender. I understand, however, the desire to keep pressure on the GOP - when the default has been there for a few days, and IOUs swamp the market, the pressure will only increase. IOUs might be a better weapon than the coin - it's a political call. One thing is clear: the GOP politically cannot demand minting the coin, to relieve the pressure from them ;-)


As usual, you are right and talking about the story others miss

From what I have seen, almost no one has been talking about the fact that minting the coin or invoking the 14th puts the focus back on Obama and opens up for all sorts of silliness regarding impeachment hearings, etc., for a problem that Congress has created. He's better to take it off the table completely and force the GOP to deal with their own crazies.

I get the impression that while there is still a fundamental misunderstanding about the debt ceiling this time around, it seems a little less widespread. I see less nonsense comparing it with credit card limits, and a little more input from the business community to not mess around with it, etc..

Maybe Obama will end up caving and compromising on future spending reductions that are irrelevant to the debt ceiling debate. But I also wonder if he might want to see some of those things happen (like COLA indexing) and this could be a way of giving him the political cover with his base to enact changes that his administration has offered up before.




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