You would have heard financial market experts talking about the fast-approaching US debt ceiling deadline and how the risk of a default by the US, is being completely underappreciated by the markets.
To be fair, markets have learnt to take this issue in its stride. After all, the US has always raised/extended/suspended/revised the debt ceiling and has always honoured its debts. As JPMorgan points out, since 1960, the US Congress has done this 78 times – under both Republican and Democratic Presidents. Markets are confident of a resolution this year as well.
Before I get to the title of this piece – ‘$1 trillion coin?’, let me quickly explain the US debt ceiling deadline as a concept.
Like any other government, the US government has expenses – lots of it! The big ones are – employee pay, spend on programs (Defense, Social Security, Medicare, Medicaid, etc) and pay interest on the public debt. To fund these responsibilities, the US government collects taxes. And it funds the difference by issuing debt.
Now the US Congress specifies an aggregate debt limit that applies to all federal US debt. That number currently stands at $31.4 trillion. US Treasury Secretary Janet Yellen wrote to Congressional leaders earlier this month, saying Treasury “will be unable to continue to satisfy all of the government’s obligations by early June, and potentially as early as June 1.”
So by early June, less that 10 days away, without a political deal to raise/extend/suspend/revise the debt ceiling, the US government will be out of money!
Now lets get to the interesting part. While the clearest path to dealing with the debt deadline, is for the US Congress to raise the debt ceiling – this means politicians (both Democrats and Republicans) coming together and agreeing to a resolution - a hard ask anywhere!
Without political agreement, what can the US government do ?
Here is the oddest solution! The US government/Treasury can mint a trillion-dollar platinum coin. By a quirk of the law, the face value of platinum coins minted by the Treasury is not limited. The idea here is to mint the trillion-dollar coin, deposit it at the Fed, and exchange it for funds. This would require the Fed to be onboard – which is not a given.
But if it came to it, would a $1 trillion coin do the job ? Yes and no. While it would avoid a default, it would most likely corrode confidence in the US monetary system. And preserving faith in the system is one of the big goals of avoiding a default!
A political solution, like always, would be the best one.
First Published: May 23, 2023 2:55 PM IST
