January 14, 2023
Like all good Keynesian economists, I’m a big fan of the platinum coin. The law explicitly allows the Treasury to print platinum coins in any denomination. That means it absolutely could deal with the debt ceiling by printing a platinum coin denominated for $1 trillion and selling it to the Fed.
This would not count as debt for debt ceiling purposes. The government would have sold an asset, the coin, in exchange for $1 trillion that it could then use to meet its bills. From an accounting standpoint, it would be the same thing as selling off blocs of government land for $1 trillion.
Unfortunately, the Biden administration seems reluctant to go the coin route, at least for now. But there is a slightly less gimmicky way for the Treasury to buy some room on the debt ceiling.
In 2020 and 2021 the Treasury issued trillions of dollars of debt at very low interest rates. Much of this was longer term debt, with maturities of 10 or even 30 years. Since interest rates are now much higher (the interest rate on 10-year Treasury bonds is now near 3.5 percent), the bonds issued at low interest rates in 2020 and 2021 would sell for much lower prices in the market today.
This might mean, for example, that a $1,000 10-year Treasury bond, issued at an interest rate of less than 1.0 percent in the summer of 2020, would sell for just $850 in the market today. For purposes of the debt ceiling, the law calculates debt at its face value, rather than its market value.
This means that Treasury could buy this bond for $850, and thereby reduce the value of outstanding debt by $150. With trillions of dollars of debt now selling for prices that are lower, and in some cases substantially lower, than their face value, the Treasury can reduce the amount of outstanding debt by hundreds of billions of dollars simply by buying up this debt at the current market price.
This will not end the standoff, we are running large deficits and eventually the Treasury will run out of bonds to buy, but this move could allow President Biden to delay the standoff over the debt ceiling for many months. (Maybe he’ll get out the coin at that point.)
As policy, this is of course absurd. The government has better things to do than to play around shuffling Treasury bonds. But the debt ceiling is also absurd. So, like the coin, it is an absurd solution to an absurd problem.
This sort of scheming on manipulating the measured size of the debt is not new, some of us have played with it for a long time. But absurd standoffs on the debt are also not new, so it’s always good to remember our stock of off-the-shelf fixes.