IOUs, Trillion-Dollar Coins and More: 5 Creative Debt Ceiling Solutions

IOUs, Trillion-Dollar Coins and More: 5 Creative Debt Ceiling Solutions

Tick, tock. Tick, tock.

The country hit its debt limit on December 31, 2012--which means that the government may not be able to make payments on its debts soon. Around the same time, the automatic spending cuts (the ones that were supposed to be triggered by the fiscal cliff at the new year) will kick in.

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If the past is any indication, Congress will likely prove unable to deal with these deadlines in a timely fashion--and if they fail to deal with them altogether, the possible outcomes could include a recession, volatile stock markets and a crushing blow to our country's financial reputation. And even if we're spared all of this, Congress likely won't reach a decision quickly ... or without a major partisan battle.

Why? Well, only Congress—not the president—has the ability to raise the debt ceiling limit, which is the cap on authorized borrowing that the government is allowed to make. The president has said that he will not negotiate over the need to raise the borrowing limit, which is currently set at $16.4 trillion. He also vehemently believes that the fiscal cliff spending cuts should not be tied to this issue, but a Republican-controlled House of Representatives will likely try to pass a bill that raises the limit only if cuts are made to programs like Social Security and Medicare.

So, once again, we are facing the kind of partisan warfare and brinkmanship that caused extreme market volatility and led Standard & Poor’s to downgrade our country’s credit rating in the summer of 2011. Additionally, higher interest rates related to the battle--due to the fact that the U.S. was seen as a riskier borrower--have cost the U.S. over $18 billion.

Moody’s, another credit rating agency, has already said that political sparring could cause them to downgrade their own rating for the country—regardless of whether we actually end up defaulting. Summing up the scenario nicely, a managing director of an economics forecasting firm told The New York Times: “This is kind of a mess.”

How Exactly Did We Get Here?

Why is the wealthiest nation in the world in debt? The answer is pretty much the same as why anybody gets into debt: The U.S. is spending more—on programs like Social Security and Medicare, the military, salaries that are covered by the government, etc.—than it’s taking in from taxes.

And as we all know by now, getting Republicans and Democrats to agree on spending cuts and tax increases is a difficult task … so the country is forced into debt. While the government has already hit the $16.4 trillion limit, Treasury Secretary Timothy Geithner has been able to move money around in order to pay the government’s urgent bills.

RELATED: The 2011 Debt Ceiling Deal

How Can We Solve This Crisis?

There are a number of creative solutions that are being tossed around that could potentially end this fiasco before the final hour:

1. The Trillion-Dollar Coin

This idea—originally coined (pun intended) by an anonymous commenter known as "Beowulf" on the personal blog of financier Warren Mosler—would take advantage of a loophole in the law that allows the Treasury to produce platinum commemorative coins, which can then be sold to make a profit.

Although this law was intended to be used only for relatively inexpensive commemorative coins, “Beowulf” pointed out that there’s no real limit—so the Treasury could have a trillion-dollar coin (or multiple trillion-dollar coins) minted and then deposited into the government’s account at the Fed. With $1 trillion readily available, the government could easily begin to pay off its debts.

Could This Really Happen?

It may sound like a crazy scheme hatched in an action movie, but the trillion-dollar coin plan is legal. In fact, former U.S. Mint director Philip Diehl, who originally wrote the law that gave birth to this idea, told Wired magazine, “When I first heard about the idea to mint a trillion-dollar coin, I was very surprised. But because I know that law backwards and forwards, I knew immediately that the guy who came up with the idea was right.”

After gaining steam with bloggers and even some economists like Paul Krugman, it seemed that there was a possibility that the idea could come to fruition: On January 9, White House Press Secretary Jay Carney did not explicitly rule out the possibility of using the trillion-dollar coin loophole. However, he did say that, “there is no Plan B, there is no backup plan. There is Congress’s responsibility to pay the bills of the United States.”

On January 12, a Treasury spokesman nixed the plan as well, saying, "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 limit."

2. Federal Scrips

Although it's not as cool as a trillion-dollar coin, this plan is also creative: In this scenario, the government would pay back those who hold bonds with tax revenue collected this year. But others who are owed money by the government--federal employees, defense contractors, Medicare service providers, Social Security, etc.—the government would issue “scrips,” which are basically akin to IOUs.

These could then be redeemed at a later point for real money--if or when the debt limit is raised. The idea of using scrips first became popular during the Great Depression, when cities and businesses struggled to pay off their debts. However, it's not an ideal situation, since you're basically trusting the government on its word to pay you back. And if you're issued a scrip, you don't have a way to get the money you're owed earlier than the government can pay it back.

Could This Really Happen?

Yes. There’s even a precedent: In 2009, California issued scrips equaling $2.6 billion due to a budget crisis. Thanks to pressure from scrip recipients and the public, California was quickly able to work out a deal, allowing the scrips to be redeemed for cash within a couple of months.

3. The 14th Amendment

The 14th amendment guarantees due process and equal protection under the law--which doesn't necessarily seem to have anything to do with the debt ceiling. However, section four of the amendment states, “The validity of the public debt … shall not be questioned.” Some have interpreted this to indicate that the president is constitutionally required to continue making interest payments on debt, which would necessitate unilaterally raising the limit.

As such, many Democrats—including House Minority Leader Nancy Pelosi—are a fan of this plan because it would avoid another partisan battle by circumventing Congress altogether, as well as prevent any concessions regarding the spending cuts desired by many House Republicans.

Could This Really Happen?

Last month, Press Secretary Carney said that the president does not believe in this interpretation of the amendment, so it’s unlikely that the scenario would play out.

4. Spending Cuts

This is where the concept of “leverage” comes in: One way to solve the debt ceiling issue would be to simply cut spending, accomplishing some of the Republican goals that were unmet by the fiscal cliff resolution. Many members of the Republican Party have been fighting for years now for a Balanced Budget Amendment, which would accomplish this goal.

Could This Really Happen?

Economists predict that trying to hastily balance the budget by cutting spending equal to tax revenue would effectively shut down the economy--and cause a return to recession. Aside from that, President Obama has said, “We can’t not pay bills that we’ve already incurred … If Congress refuses to give the United States government the ability to pay these bills on time, the consequences for the entire global economy would be catastrophic.” Spending cuts floated by Republicans would likely include cuts to federal programs, such as Social Security and Medicare.

RELATED: Why It's Hard to See Eye-to-Eye on Entitlement Spending

5. Raise the Debt Ceiling

The quickest option—and the one that President Obama clearly wants—is for Congress to raise the debt ceiling, no questions asked. Assuming it won't be quite that easy, one way to raise the ceiling (approved by Speaker of the House John Boehner) is to match any increase dollar-for-dollar with spending cuts.

However—and as we’ve already said—President Obama is resistant to the idea of tying spending cuts to this issue. This was reaffirmed by Carney on January 9, who said, “I think the President has been very clear that his absolute principle is that we need to reduce our deficit in a balanced way that does not shift all the burden through cuts exclusively on senior citizens, on families who have disabled children, on families who are trying to send their kids to school.”

Could This Really Happen?

Yes, it is possible that Congress could just decide to raise the debt ceiling. In fact, they’ve been doing it since 1917, when it was first put into place. But it's unlikely to happen without a fight over spending cuts.

What to Expect Moving Forward

If we had to make a prediction, we'd say that the more creative solutions--like the scrips and the 14th amendment--will likely not come to pass, since President Obama is pressed to prove that he can move his agenda forward without succumbing to questionable measures or trying to circumvent House Republicans.

What is clear is that both sides are gearing up for battle ... and it may very well end in another down-to-the-wire standoff that has started to characterize the U.S. government. We're keeping our fingers crossed that our elected officials can get it together to reach a solution--before the clock strikes midnight on the deadline.

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