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The Debt Ceiling, Plan E

1/04/2013 02:51:00 PM
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Apparently we are scheduled to hit the debt ceiling on monday, and will have about 2 months before we need to do something about it. There have been a few options proposed to deal with it:
  1. Plan A: Abolish the debt ceiling. 
  2. Plan B: Raise the debt ceiling, like we always do.
  3. Plan C: Plead the 14th
  4. Plan D: Mint a platnum coin worth $2 trillion.
Plan A is the only obviously sensible option, the other three are downright loony. Now, if you think we shouldn't abolish the debt ceiling, then you fall into one of two categories--either you don't know how public finances work, or you are a right-wing partisan who wants to threaten the global economy with sovereign default every year to achieve your private aspirations for an arbitrarily small government. (By the way, we already have an annual budget, as well, for you to do that with, with far less consequences for the economy).

I decided to take a look at the actual letter of the law to get a grasp on the legal question here. You see, the United States has both an annual budget appropriations as well as a debt ceiling. The supreme court has ruled that the Treasury has zero legal authority to deny payment on any budget appropriations authorized by congress in the annual budget. But then there is the debt ceiling, or more precisely, section 3101 of the United States Code, which says
"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"
I'm not a lawyer and haven't read the entire US code, nor much of the relevant case-law. However, what this says is that the treasury can issue an unlimited number of bonds, so long as only the first $14.3 trillion carry a guarantee of repayment. It seems to me that, in an emergency scenario where Congress fails to raise the ceiling in time, the Treasury could offer some sort of special "Patriot Bonds" or something that mature in, say, 30 years but carry no explicit promise of repayment. The idea is that as soon as Congress raises the debt ceiling the Secretary would buy the bonds back at face value, and issue real bonds. The plain text of the law says that the debt ceiling applies only to the government guarantee of repayment, not to the actual issuance of bonds.

Let's call this Plan E. But lets think about this a little further--the law mandates that the Treasury pay all appropriations in full, and makes no allowance for non-payment for cases where there is no debt-ceiling increase. That means that in the absence of enactment of Plans A through D, then Plan E is not merely an option for the Treasury, but actually legally mandated--the have no option but to continue to issue unguaranteed bonds to pay all appropriations in full.