Weekly asset allocation: the debt ceiling and the platinum coin


Confluence Investment Management offers various asset allocation products which are managed using top down or macro analysis. We publish thoughts on asset allocation on a weekly basis in this report, updating the report every Friday, with an accompanying podcast.

The debt limit on authorized treasury borrowings has created a periodic problem in recent years. When the limit had been reached in the past, it triggered a government shutdown. However, not all government shutdowns are simply due to reaching the debt ceiling. Sometimes a shutdown occurs because Congress and the White House cannot agree on a budget. A debt ceiling problem is different. Congress authorizes the Treasury to issue a limited level of debt; once the cap is reached, the treasury can no longer issue treasury bills, treasury bills and treasury bonds, resulting in a lack of funding that can trigger a government shutdown.

The debt ceiling was created to improve efficiency. Prior to 1917, Congress attached funding to each spending measure. Either taxpayer money was spent on spending and the treasury was made responsible for disbursing the funds, or the treasury was allowed to issue debt to finance a project. As expenses increased to finance World War I, this method became cumbersome. So Congress gave the Treasury a limit on what it could borrow and allowed it to allocate taxes or debt to fund authorized spending. The 1917 measure did not give blanket approval on all spending but gave the Treasury some flexibility. In 1939, as World War II loomed, the Treasury was given a general limit and great flexibility in using taxpayer money or debt to fund spending. Essentially, the debt ceiling is a device to streamline the financing of government activities. These are expenses already authorized by Congress. The debt limit was not designed to limit spending; it is the work of Congress, which should intervene in the budget process.

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Reaching the debt ceiling means that the Treasury is not allowed to borrow more money. Since the expenses have already been authorized, it would seem reasonable to simply increase the limit.1 However, the debt limit gives parties in Congress the power to oppose the increase in the debt limit and try to force spending cuts. For the political party out of power, using the debt ceiling to get concessions can be helpful. Therefore, what was originally conceived as a convenience for the Treasury has become a political tool, with the power to shut down the government and run the risk of a Treasury default. Because, if the treasury cannot borrow, it may not be able to repay the existing debt.

In response, commentators have suggested two ways to address the debt ceiling problem:

1. Ignore it and keep borrowing: Although the Treasury does not have congressional authorization to do so, defaulting on the Treasury’s debt would violate the 14th Amendment to the Constitution. Section four of the amendment states that “the validity of the US public debt, authorized by law… shall not be called into question. Legal scholars argue that this means that the United States cannot default on its debt, and therefore the Treasury may, to obey this amendment, borrow funds to ensure that the default does not occur, despite actions of Congress.

2. Strike a high value coin: This idea has become popular in some circles. The Treasury has the ability to create money through currency and minting. It does so to provide circulation currency. Most of the money is created by the banking system. Physical currency is only 10% of M2, but in theory the Treasury could mint a trillion dollar coin in platinum2. The US Mint has legal restrictions against printing high face value paper money. It has similar restrictions on parts. The law limits most metal coins to denominations of $ 50, $ 25, $ 10, $ 5, and $ 1. However, in what appears to be an oversight, these restrictions do not apply to platinum coins. Usually the value of the coin exceeds the value of the metal from which it is minted, allowing the Treasury to capture the seigniorage. In this case, the seigniorage would be extraordinary. Once minted, the Treasury would present the coin to the Federal Reserve, which would credit the Treasury account with $ 1,000 billion and give the Treasury new borrowing power.

Until now, administrations have avoided using either method. The former could trigger a constitutional crisis because it would apparently allow the Treasury to create as much funding as it wants by borrowing and undermine the “stock market power” of Congress. The second is clearly a ruse, taking advantage of an oversight of the law to give the Treasury unlimited seigniorage, also deriding the authority of Congress.

Yet both tactics reveal something important about the nature of money. The Constitution was written at a time when money was mainly backed up by gold and silver. In this case, money is scarce by design, and the supply can only be increased by mining or debasement. The United States has been on a fiat currency system since President Nixon stopped binding on gold by withdrawing from the Bretton Woods agreement. In a fiduciary system, the difference between money and debt is primarily a question of perception. The latter pays interest, but the government can finance itself without taxes or borrowing. The platinum coin is simply part of the treasury’s coin minting ability, and even though it is limited by denomination, it can still simply print change. Of course, if the government increases the money supply without limit, not only will inflation grow, but confidence in the currency could be shaken. This is the political risk of modern monetary theory3 (MMT). The current Congressional expenditure authorization system was originally designed to tie tax revenue or borrowing. The debt limit controversy could separate government funding from the responsibility of Congress. We suspect supporters of ignoring the cap or minting a coin in favor of ending this compulsion. Once that constraint is lifted, as MMT suggests, there really is no monetary constraint on government spending other than fear of undermining confidence in the currency. Once this principle is accepted, the idea that there is no funding constraint for government, the question for government is what to fund, not if it can fund.

1 The only other western country with a debt ceiling is Denmark, but it’s set so high that it doesn’t make sense.
2 Platinum coins may be minted in any denomination under 31 USC § 5112, which permits the Treasury to mint and issue platinum coins of any denomination. More specifically, “the Secretary may mint and issue Platinum Bullion Coins and Platinum Evidence Coins in accordance with such specifications, models, varieties, quantities, denominations and inscriptions as the Secretary, at his discretion, may prescribe from time to time. other. ”
3 See our MMT series, Parts I, II, III and IV.

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