What’s Wrong Today:
The US Treasury will hit America’s debt ceiling on October 17. Since we
already have a political impasse on the continuing resolution (the CR) to fund
government operations and are in the midst of a partial federal government
shutdown, there should be little expectation that the same parties will put
down their ideology and rhetoric long enough to make a deal on the debt ceiling:
But the economic turmoil that will be caused by defaulting on US Government
debt and compromising the Full Faith and Credit of US debt is a much more serious long term problem for the country than a partial government shutdown.
So, how can Mr. Obama dodge the debt ceiling?
Here is
a little debt ceiling history: After the foundation of the republic, the
Treasury went to Congress to approve each new bond issue. In 1917, with war
breaking out in Europe, Congress reformed the system to give the Treasury more
freedom of action, establishing an overall ceiling within which it could issue
bonds. It was similar to a line of credit at the bank.
Until 2010,
the increase of the debt ceiling when required was mostly a routine
transaction. But after the Tea Party gained control of the Republican agenda, a
number of GOP Congressmen balked at routine approval of increasing the debt
ceiling. This caused the Sequester.
Now that we have been unable to solve the budget impasse, the Treasury
should be directed to prepare an issue of Consols, to be used
in the event that Congress refuses to increase the debt ceiling.
What
is a Consol? It is a form of perpetual bond, that is,
a bond that has no maturity date. Issuers pay interest on consols in
perpetuity, and the bonds are not redeemable. They can be issued with a “call”
by the Treasury, so that the Treasury would have the option to retire the Consol at a specified year in the future.
Consols
could be issued under Treasury’s
existing bond authority. From 31 USC 3102:
section to the public and to Government accounts at any annual interest rate…
In Section 3121:
the dates for paying principal and interest…
The permissive “may”
in Section 3121 above, instead
of the mandatory “shall” means that the Secretary doesn’t actually have to ever
set a maturity date for paying the principal.
From
Mike
Norman Economics:
website says, “When a Treasury bond matures you are paid its face value”.
But a bond’s face value is the principal the Treasury promises to
repay. So if the bond doesn’t mature, there is no face value to repay, and it is entitled
to interest only. In accounting, it would be treated as a form of equity, not debt.
If we look at the debt ceiling statute (31
USC 3101):
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…”
So Consols are exempt from the debt ceiling because there is no obligation to repay any principal: Therefore it isn’t debt.
Consols have been
issued by the US Treasury in the past: the 2% gold Consols of 1930. The Consols
of 1930 were issued in 1900 to consolidate (thus, “Consols”) several older high
interest bond series. The two important deal
terms for the Consols of 1930 were: “Length of loan, indefinite”…“and is
redeemable at the pleasure of the United States after the first day of April,
1930″. They were called by the
Treasury on July
30, 1935. Even if they were still outstanding, they would be exempt from
the debt limit.
Therefore, Consols are an ingenious work around for the poorly designed US Code. We shouldn’t have to work around our system of laws though. If our democracy is
to have any chance of working, the politicians need to understand how the
economy, budget and monetary system operate together.
Not
going to happen with these guys, though.
So, would issuing
these Consols survive a Constitutional challenge by Republicans? The
Wrongologist is not a lawyer, much less a constitutional lawyer, but Chief
Justice Roberts has written that if there two possible meanings of a law— one
path constitutional and the other unconstitutional, the court must pick the meaning that prevents a breach of the
Constitution:
statute can sometimes have more than one possible meaning. To take a familiar
example, a law that reads “no vehicles in the park” might, or might not, ban
bicycles in the park. And it is well established that if a statute has two
possible meanings, one of which violates the Constitution, courts should adopt
the meaning that does not do so.
Justice
Story said 180 years ago:
unless the terms of an act rendered it unavoidable, to give a construction to
it which should involve a violation, however unintentional, of the
constitution. [Parsons v. Bedford, 3 Pet. 433, 448-449, 7 L.Ed. 732] (1830).
Will
those opinions carry the day? Who knows. They are better than the Trillion Dollar Coin,
an alternative solution that some believe is simpler to understand than Consols.
If
we minted a $Trillion coin, it would be perfect
if it had Nixon’s face and the motto:
“If
the President does it, it’s not illegal”.
