The Trillion Dollar Coin

The debt ceiling again takes center stage in Congress as both sides square off about increasing the debt ceiling. Janet Yellen dismissed the idea of the Federal Reserve accepting a One Trillion dollar platinum coin if the Biden administration attempted to mint one in order to prevent hitting the debt limit. Despite record tax receipts, we face this debate every few years.

What would the coin do? The Treasury would mint a trillion dollar coin in which would in turn be used to reduce the debt. It is an accounting strategy supported mostly by Democrats to circumvent the Congress and GOP who oppose raising the debt ceiling.

Origins: Bo Gritz was a Populist Party Candidate running for President in 1992. He would often campaign with a 5 inch coin to press the idea. After the Great Recession of 2008, the idea gained popularity with Democrats, as Congress was unable to present a budget and created the debt ceiling. Economist Paul Krugman, The Economist, The New York Times, and the Washington Post have supported this idea.

Continuing resolution: There is a difference between a budget and a spending bill. Since 1998 Congress has missed their deadline to pass a spending package to pay for the following fiscal year. Because the government is not allowed to operate without funding, they pass stopgap legislation called a continuing resolution to avoid a shutdown. The Congress has not passed a budget since 2008.

Debt limit: The debt limit is the total amount of money that the U.S. government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments. (U.S. Treasury website.) Republicans use the leverage of not voting for a continuing resolution so can get line-item spending cuts and reduce the deficit. Democrats believe not passing the CR will have global economic consequences and cause the U.S. to essentially default on its debt obligations. CR usually gets passed with or without concessions so fiscally both parties are responsible for $31 Trillion in debt obligations.

Debt service: Interest on Treasury Bills and bonds is nearly 15% of the Federal Budget deficit. These obligations go all the back to The New Deal. Debt service is the only part of the debt that is a past obligation. Continuing Resolution is for the following fiscal year. The GOP argues that it will pay those obligations and all the spending up to the debt ceiling. Democrats argue that debt obligations cannot be prioritized but the inability to make payments on other debt will technically put the U.S. in default in the eyes of our overseas creditors. If debt service is only 15 cents on the dollar of money we already take in as tax receipts, it is difficult to make an argument we would be in default if we do not raise the debt ceiling.

Do we risk default by not raising the debt ceiling? Technically no, but politics plays a part in the outcomes. Democrats are tying future obligations to past debt service to bargain for a higher debt ceiling. Since there is no Congressional budget, Republicans are tying their votes for a Continuing Resolution to spending cuts. Congress relies on the fact the U.S. dollar is reserve currency of the world and has certain trade advantages with petrodollars throughout the globe, so Congress has discovered it can kick the can down the road to pay for its programs. If Congress cannot agree, the U.S. Treasury and other agencies can say they can’t issue Treasury bonds (but technically can). A quick internet search will find the solution to avoiding a default is to raise the debt ceiling and pass CR, raise taxes, or cut spending.

If we can avoid default by collecting taxes or cutting spending how is default not a political tool? The federal government’s deficit grew by 50% to $6.3 trillion annually when Covid hit. We are still spending $2 trillion more annually than what we spent before Covid.

Interest Rates and the deficit

Barry Sternlicht CEO of Starwood Capital Group was recently on CNBC discussing the catastrophic effects of raising interest rates with a $32 trillion dollar deficit. He first points out that Fed Chairman Paul Volker did not have a similar deficit at the time when he raised rates to curb inflation. He provided statistics on interest paid over the last few years: 2020 $345 billion interest paid on the deficit, when average interest rates were 0.5%, 2021 $352B, interest 0.1%, 2022 $475B, interest 1.9%. In 2023 average interest rates were 4.5-5% giving you interest on deficit spending of over $1 trillion dollars.

The White House budget number for 2023 is only accounting for $400 billion dollars in interest for deficit spending, which they did not update from November. Fed Chairman Powell faces “the Weimer Republic, (Powell) has to keep printing dollars to pay interest on the deficit, putting tremendous pressure now on all ends of the curve. That will really slow the economy, (and) if the 10-year goes to 5, and this gets out of control, who is going to buy our paper? Sternlicht fears if Biden continues to listen to Washington academics who are pushing an aggressive interest rate policy, he “risks the financial stability of the entire economic system.”1

David Grimaldi, TM Foreign Exchange Sales Consultant