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Easing Concerns Over the Debt Ceiling (From a fund manager)
https://disciplinefunds.com/2023/05/12/easing-concerns-over-the-debt-ceiling/By Cullen Roche|May 12th, 2023
A few snippets here:
First, I don’t even think you get to the crisis scenario because the Treasury, President and Fed have tools to work around this and I think they’d be obligated to use these tools. For instance, let’s say we get to May 31st and the Treasury announces it has no money on June 1st. Meanwhile Congress can’t agree on anything. In this case the President is forced to invoke the 14th Amendment on May 31st to uphold the “full faith and credit of the USA”. Once we are on the verge of defaulting we’re breaching the 14th amendment, which states that it’s illegal to default. And regardless of the interpretation of these laws there are many ways to fund the Treasury without Congressional approval. This could include issuing premium bonds, coin seigniorage, selling Treasury assets or the Fed invoking the Exigent Circumstances clause of the Federal Reserve Act to directly (or indirectly) fund the Treasury.1 I am virtually certain that one or all of these would be utilized to avoid an actual default. I am not even remotely uncertain about it. It would be irresponsible and probably illegal for one or all of the above NOT to be implemented. So once we’re on the verge of breaking the law I’d assume that anything and everything is on the table. ...
Personal notes from the fund manager (which escape my limited knowledge of finance)
1 – My preferred approach would be the Fed. If I were the President I would walk into Jerome Powell’s office on May 31st and I would order him to fund the Treasury either directly or indirectly using Primary Dealers. I understand this would be highly controversial, but the Central Bank of the USA was created in large part to ensure that the US economy (and government) always has liquidity. This seems like the exact right use case for this scenario regardless of what current law says. After all, once we’re breaking laws we might as well break less bad laws to break a really bad law.2
2 – This scenario also has the useful upside of exposing the charade around how the US government borrows money from the private sector since it literally has its own bank which it can borrow from. We have a government that can literally create its own money without having to borrow from the private sector yet we continue to act like we couldn’t just borrow money directly from the Central Bank or create money directly.3
3 – A footnote inside a footnote inside a footnote. That’s a first. I can hear people screaming about this idea. Yes, it’s true. A national government could theoretically do away completely with issuing bonds and simply print cash when it spends. In fact, we already fund a lot of that spending by issuing T-Bills, which are money. So even under the current system we already fund spending with “money”. If we funded all of it with “borrowed” T-Bills or literally credited deposits into accounts there would be no meaningful difference between that system and the current one. People will scream “debt monetization”, but government T-Bills are already monetized and all government deficits should be considered money issuance in the first place regardless of how we label those assets
Personal notes from the fund manager (which escape my limited knowledge of finance)
1 – My preferred approach would be the Fed. If I were the President I would walk into Jerome Powell’s office on May 31st and I would order him to fund the Treasury either directly or indirectly using Primary Dealers. I understand this would be highly controversial, but the Central Bank of the USA was created in large part to ensure that the US economy (and government) always has liquidity. This seems like the exact right use case for this scenario regardless of what current law says. After all, once we’re breaking laws we might as well break less bad laws to break a really bad law.2
2 – This scenario also has the useful upside of exposing the charade around how the US government borrows money from the private sector since it literally has its own bank which it can borrow from. We have a government that can literally create its own money without having to borrow from the private sector yet we continue to act like we couldn’t just borrow money directly from the Central Bank or create money directly.3
3 – A footnote inside a footnote inside a footnote. That’s a first. I can hear people screaming about this idea. Yes, it’s true. A national government could theoretically do away completely with issuing bonds and simply print cash when it spends. In fact, we already fund a lot of that spending by issuing T-Bills, which are money. So even under the current system we already fund spending with “money”. If we funded all of it with “borrowed” T-Bills or literally credited deposits into accounts there would be no meaningful difference between that system and the current one. People will scream “debt monetization”, but government T-Bills are already monetized and all government deficits should be considered money issuance in the first place regardless of how we label those assets
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