The House GOP (motto: "less popular than herpes") is now a full week into its latest round of hostage-taking brinksmanship, and people are starting to figure out that the government is kind of like lawyers: Everybody hates lawyers, until they need one. And it doesn't look like they are going to end it anytime soon, for three reasons:
1) They refuse to admit that they will not get what they claim they want--the repeal of the ACA.
2) They know they want to get something out of this thing that's been so politically expensive, they just don't know what.
3) Until they can reach a deal that allows them to declare victory, they aren't going to do anything.
So, when you get down to it, the thing that's most keeping the government shut down at the moment is pride.
It may take some time for the suffering to reach the opinion makers, but it will get there eventually.
The problem, however, is that as bad as it is for the government to shut down, it would have to be shut down for a long time for it to have an irrecoverable impact.
Fortunately for the House Republicans, there is a much better hostage looming.
About 10 days from today, give or take, the federal government will reach the debt limit, at which point it will be--at least according to the law--legally unable to borrow money.
Now, there are a lot of reasons why it's really insane to have a debt limit in the first place--only we and Denmark have a debt ceiling, and Denmark's is roughly three times the amount of its outstanding debt--but those are the conditions under which we operate.
The consequences of hitting the debt limit are dire. Right now, despite all of our economic problems and gridlocked government, U.S. Treasury securities are still considered the safest investment in the world, "risk-free" in terms of credit risk. For that reason, we get, from the open market, the lowest interest rates of anyone who borrows money (which is everybody, more or less).
A substantial part of the reason for that is that in over 200 years of borrowing money, the federal government's obligations have always, ALWAYS, been paid on time and in full, as agreed.
If something happens to call into question our ability to repay the obligations we've incurred, interest rates will go up because of the perception of risk. Treasuries will no longer be considered to be a risk-free investment. We will be more at the mercy of our creditors than we are today.
Our credit rating is not a position we should gamble with or surrender lightly.
Yet there is a core of about 40-50 Tea Party-affiliated radicals in the House GOP caucus who are aiming to do just that. They don't care about the consequences (or they don't believe there will be any). They are in the process of taking our good credit hostage so that they can extract from us that which they could not fairly win at the ballot box. It's despicable.
It's also utterly unnecessary.
To understand why, and why having a debt ceiling in the first place is foolish, it's necessary to understand a few things about money and how it gets created.
As I'm sure you understand, the federal government has created all of the dollars that exist in the world. A very small percentage of that money exists in the form of coins that are in circulation. A somewhat larger percentage of that money exists in paper bills--$1, $2, $5, $10, $20, $50, and $100--that are also in circulation. But the vast majority of the dollars that exist in the world exist as credits on electronic bank ledgers. Those credits have absolutely zero physical existence in the world. They are just abstract numbers.
The government creates money by loaning money to banks, other financial institutions, and--as it turns out--to the government itself. The Federal Reserve, which maintains the master electronic bank ledger that keeps track of who has what money, loans money by increasing a particular institution's credit balance on those ledgers.
(You've heard about the Federal Reserve setting or adjusting interest rates from time to time. One of the rates the Federal Reserve sets is the rate that banks get charged for borrowing money from the Federal Reserve (the "discount rate").)
When the Federal Reserve loans money, all it has to do is hit a few keys on a keyboard, increasing the borrower's credit balance on the ledger. That money is created from thin air. And when the money is paid back, the process is reversed and the money is destroyed.
As I noted above, the Federal Reserve keeps track of the government's balances, also. The government gets money from a lot of sources--tax deposits, user fees, tariffs, loan payments, bond sales--and all of that money gets deposited into the Treasury and ultimately ends up as a number at the Federal Reserve. The Fed can also loan money to the government, directly or indirectly, by buying government securities. In fact, the Fed currently owns about $1.6 trillion in Treasury securities.
Now, I mentioned earlier that the federal government issues coins. Suppose you owed $100 in taxes, and in order to pay those taxes, you went down to the IRS office and handed them 100 dollar coins. Those coins were issued by the Treasury without the Fed's involvement. What happens to those coins after you hand them over to the clerk? Most likely, they would get deposited into a bank for credit to the government's ledger at the Fed in a complicated series of transactions involving the bank's reserve requirements. But let's simplify the process a bit and pretend that the clerk simply walks those coins down to the Fed and deposits them there. The Fed would put them in a vault and issue an electronic credit to the government for $100. The Fed could sell the coins, or it could send them out as part of a loan. But they're going to have a value of $100 in the aggregate, and the Fed is legally obligated to accept them for deposit and credit them at face value.
Here is where things get a bit interesting. It doesn't cost the Treasury $1 to make a $1 coin. In fact, it costs about 30 cents. The difference in price is called "seigniorage," and it refers to the difference between the cost to produce physical money and the value that money has as legal tender.
And it turns out that those Federal Reserve Notes that are stuffed into your wallet--the dollar bills, tens, and twenties--those have a kind of seigniorage, too. They cost about 5 cents to produce but are worth their face value in anyone's hands.
You might be wondering, what does this have to do with the debt? Pay close attention.
What gives a $1 coin its $1 value? The fact that the Treasury says it's worth $1. That, and that alone. The metals inside are basically worthless. The coins aren't rare. A dollar coin has a dollar's value because the Treasury says it does.
So, what's to stop the Treasury from minting a few trillion of these coins, depositing them in the Fed and getting a credit on the balance sheet? Debt crisis solved, right?
Legally, the answer is, nothing is stopping that from happening, except as I'll discuss below. What stops it from happening as a practical matter is that there probably isn't enough copper, manganese, nickel, and zinc to make the trillions of coins necessary to have an impact--plus, a return of 70 cents on the dollar probably isn't enough to justify it.
But if the Federal Reserve can create money out of thin air and electrons, and if the Treasury can create money that has more value than the value of its components, why should we have a debt ceiling at all?
After all, the government can't spend money that isn't authorized by Congress through appropriations.
The debt ceiling only exists as a political tool to constrain Congress's ability to spend. It is an entirely arbitrary limit on the aggregate debt of the country.
It makes sense for individuals to have spending limits and credit limits. We can't create money.
But the government can.
It turns out, there is a perfectly reasonable way to resolve this debt crisis, in a way that carries no risks and ensures that the validity of the public debt is not questioned.
The Constitution gives to Congress the authority to determine what money will be coined. But it's more convenient for the executive branch to deal with the specifics, so Congress has simply passed a few laws giving the Secretary of the Treasury the authority to carry out the coinage processes. Congress has put a lot of limits on those processes, in terms of which coins will be issued, and how many, and at what denominations and compositions.
But it has also authorized one particular type of coin to be minted and entirely delegated the authority over the face value and number of coins. The Treasury can mint a platinum coin in any denomination it chooses. Doing so is a matter of unquestioned legality.
There is literally nothing stopping the Secretary of the Treasury from minting a platinum coin with a value of $1 trillion, or $5 trillion, and depositing that coin with the Federal Reserve. As noted above, it would only take probably a few hundred dollars' worth of platinum to do it. (Platinum is trading at about $1400 an ounce right now.) As noted above, the Fed would be obligated to accept it.
Indeed, we could pay off the entire debt in that way, if we liked.
Remember, the government creates the money.
There are some practical reasons not to do this except in the most dire of emergencies--when, for example, the government is being held hostage by a group of people who hate the government and the President and are bent on doing harm to both, regardless of the consequences. Excessive activity of this type could lead to inflation, which is problematic mostly because it would make borrowing more expensive. That's functionally the same as a default without the stigma of a default.
But if a hostage is taken, and ransom demanded, getting more time to protect and rescue the hostage is imperative. This arrangement could defer the crisis for a long time, maybe months, at least until there has been an intervening election and the idiots that are doing this to us can be voted out.
Mint the coin.