I did a couple of interviews for the BBC Sunday afternoon and evening explaining the current debate that’s raging over the debt ceiling. I’ll post the interviews when I have the links for them. But here’s the basic gist of where I stand on all of this. I think it’s all rather straight forward:
- The debt ceiling is a silly rule that only exists in one democratic nation outside of the USA.
- Why is it silly? It’s silly because Congress already debated and voted on the spending that results in the debt issuance.
- If Congress wants to reduce spending they should revisit items through the standard legislative process as opposed to holding the US economy hostage once every few months and causing endless uncertainty for the rest of us.
- The US government can always harness its banking system to procure funding for future spending (well, 99% of the time and in that 1% of the time when it can’t the Fed will buy the bonds on the primary market, but that’s a different matter and totally different from QE). The system is designed so the US government can always procure funds. Auctions, for instance, are literally designed not to fail. So the USA is not designed like Greece or Spain. The US government has an inflation constraint, not a solvency constraint. (See here for more).
- Willingly defaulting on US debt by using the debt ceiling as a threat is pure madness. I can’t think of many things that would be more reckless than this.
- The platinum trillion dollar coin, which was first discussed on the internet by my friend Carlos Mucha and then first disseminated by Ramanan, (later by people like me) is a legal workaround the risk of defaulting in which the Treasurer can mint a trillion dollar coin, deposit it at the Fed and effectively allow the US government to cancel $1 trillion of existing debt. It’s the same as raising the debt ceiling $1T except it cancels outstanding debt as opposed to raising this silly self imposed constraint.
- It’s not inflationary since it’s not $1T in new spending, but rather a cancelling of existing debt that the Fed has already taken out of the private sector to begin with.
- It’s a silly idea. It’s an accounting gimmick. And I absolutely don’t think it should be used.
- It’s sad that this is the current state of affairs in American politics. The fact that we’re fighting stupid ideas with stupider ideas would be funny if it wasn’t so sad.
- BUT, if we have to choose between defaulting, which would be catastrophic and implementing a silly accounting trick then the decision is a no-brainer. It would be unpatriotic to default. Even more unpatriotic for leaders to allow default when they could mint the coin.
- Hopefully there’s a rational way around all of this. The best suggestion I’ve heard is from Josh Barro at Bloomberg who says we should eliminate the debt ceiling in exchange for closing the coin loophole. Sounds fair enough to me.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.