I. The Permanent Debt Ceiling Solution.
II. A Vote Against Avoiding Default Amounts to Treason.
I. It is politically very positive for our nation that Biden and McCarthy reached a compromise on the debt ceiling, thereby avoiding default which would call into question our political competence. In any case, it is worth realizing that there is always a simple solution to avoid any debt ceiling crisis whenever there is a political impasse. There is, in fact, no need for rushed high stakes negotiations in order to avoid default. How? The president simply orders the Federal Reserve to directly pay off all maturing Treasury debt (bills, notes, and bonds) and all maturing Treasury interest with freshly “printed” money (just like QE but without the intermediary step of the Treasury issuing new bills, notes, or bonds).
What is the effect of the Fed directly paying off maturing bonds and interest with freshly “printed” money? Beyond avoiding default, nothing! The “freshly printed money” does not represent new debt (in fact, no new Treasury debt has been issued), and although it increases the money supply, it is not inflationary so long as it does not create excess aggregate demand, which is never the case unless the economy is already operating at full capacity. In any case, the amount of maturing debt and interest over a few months is always insignificant relative to the size of the economy and of total federal debt outstanding.
Unfortunately, most of our politicians, especially conservative Republicans, have a flawed understanding of the causes of inflation and of the effects of budget deficits and of federal debt, and that is why they are obsessed with federal deficits and indebtedness. In fact, all their theories on the causes of inflation and the effects of budget deficits and federal debt have been flatly contradicted by the statistics of the past 50 years. Between 2009 and 2019 we have had record budget deficits, record federal debt, and record “printed money” (trillions of dollars of Quantitative Easing by the Fed following the sub-prime crisis and then the Covid crisis), yet inflation and interest rates were historically low during that entire 10-year time span. (Inflation started rising suddenly in 2020 following the outbreak of Covid which disrupted supply chains, and then again following Russia’s invasion of Ukraine in February 2022 and its effects on the price of oil, natural gas, and grains. Both inflations had nothing to do with the Fed’s QE or with our budget deficits. They were “cost-push” inflation, as opposed to “demand-pull” inflation.)
There is clearly no cause and effect by large budget deficits and federal indebtedness on the course of inflation and interest rates. The explanation of that “paradox”? Contrary to superficial conventional/mainstream economic wisdom, budget deficits and federal debt do not necessarily cause excess aggregate demand (“demand-pull inflation”, the situation of “too much money chasing too few goods”). In fact, both federal deficits and indebtedness need to be considered in the context of actual capacity utilization. So long as there is slack (unused productive capacity and unemployment), there will be no demand-pull inflation or corresponding rise in interest rates.
As for Republicans’ concerns that current outstanding federal debt will be passed on to future generations, that is due to not understanding that the Fed can cancel any amount of its holdings of Treasury debt whenever it wants, by not requiring the Treasury to pay the Fed the principal of its maturing bonds. The effect of the Fed’s cancelling of any of its Treasury holdings is actually a reduction of the federal debt outstanding. In other words, any Fed cancellation of its Treasury holdings results in more room for the issuance of new Treasury bonds while still remaining below the debt ceiling. (Treasury securities held by the Fed are actually only “virtual debt” since they can be cancelled by the Fed, as opposed to Treasury securities held by individuals and investment funds, constituting instead “real” debt which the Fed cannot cancel.) Importantly, cancellation of debt does not increase the money supply by one cent, therefore it is not inflationary.
Once Congress has approved the Biden-McCarthy compromise, Biden could test the legality of a president ordering the Federal Reserve to cancel one of its Treasury bond holdings, thereby reducing the outstanding federal debt by the face value of the canceled Treasury bonds. Republicans might well challenge the Fed’s cancellation, but on what valid legal grounds? There are none! The challenge would fail, even if it went all the way to the Supreme Court, since the bond cancellation does not violate Congress’ exclusive borrowing authorization power, nor does it increase the federal debt (it reduces it!), nor does it violate the debt ceiling. The problem of the debt ceiling is gone, with full respect of the Constitution.
II. Meanwhile, the 14th Amendment clearly states that the debt of the United States must be honored, it cannot be questioned. Therefore, it is the president’s and Congress’ constitutional duty to pay off all maturing federal debt and interest due. They have both given an oath to uphold the Constitution, and to not pay off maturing federal debt or interest due would be a violation of their oath, regardless of any congressionally imposed debt ceiling (which, by the way, the Constitution does not even mention, therefore it has no constitutional force!). What’s more, since non-payment of principal or interest would place the nation in default, causing serious financial, economic, social, and even foreign policy problems (including helping our enemies in times of both war and peace), the refusal by any president, senator, or representative to adhere to a congressional majority plan to avoid default would actually constitute treason, which absolutely requires indictment and conviction. In the absence of a congressional majority plan to avoid default, the president must take charge and choose the simplest, non-disruptive method to avoid default, which consists of ordering the Federal Reserve to directly pay off all maturing Treasury bonds and interest.
May 29. 2023
(c) Edward Sonnino 2023
