He's done it again... (SAUL LOEB/AFP via Getty Images)

May 30, 2023   7 mins

Economic Armageddon, we were told, was only a few days away — possibly even as soon as Thursday. It would be, warned US Treasury Secretary Janet Yellen, “an economic and financial catastrophe”. Was the panic justified?

It seems not. After a month of frenzied talk about America’s looming bankruptcy, on Sunday a deal was finally reached to raise the government’s debt ceiling. The agreement, which still needs to be rubber-stamped by Congress, was “worthy of the American people”, said the Republican House speaker Kevin McCarthy.

As a fable of unnecessary hysteria, this story started in January, when the American government reached its debt ceiling — the legislative limit on the amount of national debt that can be incurred by the US Treasury, which is currently set at $31.4 trillion. When this happens, Congress has to agree to raise the debt limit or the government won’t be able to cover its fiscal deficit, meaning — it is claimed — that it won’t be able to pay its bills.

Reading the media’s coverage in recent weeks, you’d be forgiven for not realising that this ceiling has been raised 80 times without much controversy. In recent years, however, the issue has been increasingly weaponised by the Republicans in order to gain concessions — usually in the form of budget cuts. This is what led to the 2011-2013 debt ceiling crises, which culminated in Obama striking a deal with the GOP that included massive spending cuts.

A similar drama is concluding today. Just as a decade ago, the Republicans agitated for big cuts in federal spending as a condition for approving the debt ceiling raise; in fact, McCarthy won the speakership on a promise to not pass a “clean” debt ceiling bill — one without spending cuts attached. It led to weeks of failed negotiations, with Yellen warning that soon the government would no longer be able to cover its payroll for servicemen and federal employees, Social Security and Medicare benefits, and would even be forced to default on its debt.

It was understandably a daunting prospect, not just for the US but for the entire global economy. And yet, this wasn’t the entire story. Most media reports took the impending “fiscal cliff” to mean that the US government was about to “run out of money”. Framing the issue in these terms, however, was highly misleading.

As the issuer of the dollar, the US government can never “run out of money”: there are no bills coming that it can’t afford to pay, nor can it become insolvent on its outstanding debt, regardless of how big it may be, in absolute terms or in relation to GDP. As Trump said in 2016: “This is the United States government. First of all, you never have to default because you print the money.” For all his other faults, on this he was right — even Bernie Sanders recently was forced to admit that “even a broken clock is right twice a day”. In other words, the recent crisis was entirely of the US’s own making, stemming as it was from a rule — the debt ceiling — that it imposed upon itself.

Indeed, the US is only one of two countries in the world with a rule of this kind — the other is Denmark, where it has never been used in political brinkmanship. In America, the debt ceiling was created in the early 20th century in the hope it would make government run more smoothly: Congress no longer had to ask for permission each time it needed to issue debt to pay bills. In recent years, however, several policymakers have suggested that the rule has become more trouble than it’s worth, insofar as it allows political bargaining over policies that Congress has already approved. In 2021, for instance, Yellen herself claimed that “it is very destructive to put the president and myself, as Treasury secretary, in a situation where we might be unable to pay the bills that result from those past decisions”. At least two other former Federal Reserve chairmen, Alan Greenspan and Ben Bernanke, as well as four former Treasury Secretaries, have expressed the same opinion. In short, there is no technical reason for the debt ceiling to exist, and it could have been legislated out of existence while the Democrats had full control of Congress.

But given that the debt ceiling does exist, does this mean that the risk of default was real? For much of the media, it was an open-and-shut case. “Because the United States runs budget deficits — meaning it spends more than it takes in through taxes and other revenue — it must borrow huge sums of money to pay its bills”, as the New York Times puts it. In fact, the US, like every currency-issuing country, doesn’t need to borrow its own currency to finance its fiscal deficit: from a technical standpoint, the government spends first and then issues bonds to “cover” the resulting deficit. This serves many purposes, largely pertaining to monetary policy — but “raising funds” is not one of them.

Much like the debt ceiling itself, the decision to match the deficit with debt is a voluntary choice, not a technical (or legal) one. Some years ago, for instance, former Fed chair Bernanke suggested that the Treasury could simply instruct the central bank to credit accounts on its behalf, without matching the fiscal deficit with debt issued to the private sector or central bank. It’s unclear why a similar measure couldn’t be adopted today to circumvent the debt limit. Another possible solution would be for the Fed to extend a line of credit — an overdraft — to the Treasury. There doesn’t appear to be any legal obstacle prohibiting the Fed from doing this. After all, if it can bail out the banks, surely it can bail out the US government?

And this is hardly the only solution: a number of creative remedies have been concocted in recent decades — perhaps none more tantalisingly inventive than the $1 trillion platinum coin. In 1997, a newly passed law gave the Treasury full unilateral authority to mint platinum coins of whatever value. Yellen could therefore instruct the Federal Reserve to create a coin worth $1 trillion, and then deposit it with the Fed, thus adding $1 trillion to the Treasury’s account at the central bank. The government could then draw on this account to pay its bills without having to issue new debt. The idea was first put forward by a blogger in 2011 — leading to the hashtag #MintTheCoin going viral on Twitter — but has since captured the imagination of academics, pundits and policymakers. Even Philip Diehl, the former head of the US Mint, has described it as “ingenious”.

Yellen, however, recently dismissed the trillion-dollar coin as a “gimmick” — and this may be true. But if the US is now in a position where it has to consider “gimmicks” to avoid a self-engineered default, it is only because it has chosen to impose upon itself a series of legal constraints that inhibit its ability to utilise its currency-issuing capacities.

Meanwhile, next time a debt ceiling crisis emerges, a less unorthodox, but potentially even more controversial, solution would be simply for the government to ignore it and continue to issue more bonds. In doing so, it would be violating the law, but the government would also be violating the law by refusing to honour public spending already authorised by Congress. As economist James Galbraith has noted, at that point, all such spending is an obligation: “The debt ceiling statute does not authorise the breach of any obligation,” he wrote.

Proponents of this solution also point to the 14th Amendment of the Constitution, which mandates that all the government’s financial obligations be met. According to a number of constitutional law experts, this renders the debt ceiling unconstitutional. Like the trillion-dollar coin, in recent years, the 14th-Amendment theory has gone from “fringe” to “mainstream”. In the past, Nancy Pelosi and former President Bill Clinton both urged Obama to invoke the 14th Amendment during his debt ceiling showdowns. For law experts Neil Buchanan and Michael Dorf, this would be the “least unconstitutional” option — that is, less unconstitutional than the US government defaulting on its obligations.

All of which raises an important question: if, as it seems, there were several legal and technical alternatives to the catastrophic scenario prophesied by Yellen, why all the scaremongering? As eccentric as some of these solutions may be, surely “crashing the world economy for fear of looking silly would be unforgivable,” as Paul Krugman wrote. Certainly, it seems impossible to believe that the US government would ever have allowed such a scenario to materialise. So why were we told that the only viable alternative to economic apocalypse was for Biden to strike a deal with the Republicans that would inevitably entail sweeping cuts to education, healthcare, housing and other vital programmes relied upon by millions of American families?

Indeed, a certain hypocrisy behind the deficit-reduction debate becomes apparent when we consider how both the Republicans and the Democrats continue to ignore the fiscal elephant in the room: the US’s colossal and growing military budget. Despite the fact that social spending as a percentage of GDP has declined sharply since 2011, the US has just approved the largest defence budget in the country’s history: $8.5 trillion over the next decade. The Pentagon now consumes more than half of the federal discretionary budget, leaving public health, environmental protection and education to compete for what remains. Meanwhile, according to the Watson Institute at Brown University, the cost of US wars from 2001 to 2022 amounted to $8 trillion — more than half of the extra debt incurred since then. 

And yet, once again, the latest debt ceiling deal essentially caps all federal spending — healthcare, social services, transportation, education — except defense spending, which is projected to rise 3% on this year. One almost gets the impression that the debt ceiling is partly designed to allow the two parties to engage in a bit of cosplaying, only to ultimately reach a budgetary “compromise” which boils down to austerity for the working classes and trillions for the corporate elites.

All of which suggests that the whole debt ceiling drama was little more than a red herring. After all, if the US Treasury really wanted to stave off “an economic and financial catastrophe” without enforcing austerity, it has the means to do so. That’s partly why few serious commentators really believe debt ceiling crises are anything more than political theatre — and this time was no different. As ever, a solution appears to have miraculously appeared just before the deadline is reached. And Treasury officials are already patting themselves on the back, satisfied in the knowledge that another unnecessary panic has been averted — until, of course, the next time.

Thomas Fazi is an UnHerd columnist and translator. His latest book is The Covid Consensus, co-authored with Toby Green.