Despite Backup Plans, The Debt-Ceiling Standoff Poses Obstacles

To prevent default, suggestions like minting a coin and giving payments priority are met with suspicion.

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In the event that Congress does not enact legislation raising the debt ceiling, there is no obvious way to avert default.

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Any fallback strategy in the event that Democrats and Republicans are unable to reach an agreement by this summer has challenges, from simply ignoring the borrowing limit to minting a trillion-dollar coin to giving some payments a priority.

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The present $31.4 trillion debt ceiling must be increased by Congress in order to avoid defaulting on debt payments and other government commitments like Social Security payments.

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Democrats and Vice President Biden want to lift the debt ceiling unconditionally. Republicans, though, are adamant about cutting expenditures along with raising the debt ceiling. The deadlock has increased interest in potential solutions that might assist the United States in avoiding a default. But since these strategies haven't been tried, it's unclear whether lawmakers, the White House, or the financial markets would regard them as acceptable or useful.

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The American Enterprise Institute's Michael Strain, director of Economic Policy Research, cautioned that using any of the suggested workarounds wouldn't inspire trust.

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The United States is so dysfunctional that there is genuine concern about our ability to pay our obligations, which would be communicated to investors, global markets, and other countries if those paths out of this situation were taken. That is what counts," he declared.

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This is a list of the choices that decision-makers have considered—along with any potential drawbacks—in the event that Congress decides not to act to raise the borrowing limit.

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A Single-Sided Executive Action

Researchers have questioned whether the White House could merely disregard the debt ceiling. They contend that the debt ceiling conflicts with another directive from Congress to the executive branch, which is to expend funds as specified in spending legislation.

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According to this line of thinking, the executive branch is not adhering to congressional spending instructions if it respects the debt ceiling and ceases making some payments. The executive branch is not abiding by the debt ceiling set by Congress if it continues to make all of its payments.

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While some academics have come to the conclusion that the White House could just keep spending money in such a situation, the president must decide whether to break one law or another.

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The 14th amendment, which states that the legitimacy of U.S. public debt "must not be questioned," is another option that some legal experts think the president may use to continue paying the nation's debts. Former House Speaker Nancy Pelosi and former President Bill Clinton are among those who have suggested that the White House should depend on the 14th amendment in a debt ceiling crisis. 

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Others, however, warn that the 14th amendment may not provide the White House complete discretion to continue paying the government's liabilities, claiming that the clause was designed to address concerns that Southern states would refuse to pay Civil War-related debts.

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According to the Biden administration, no workarounds are being considered.

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"We are not contemplating any legislation that would circumvent Congress. According to White House press secretary Karine Jean-Pierre, that is not what we are doing.

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Prioritization

The Treasury Department began using so-called extraordinary measures last month to save cash, and according to its most recent estimate, such actions may allow for the extension of payments at least into early June.

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Several officials and lawmakers have talked about the potential that the Treasury Department may continue paying some—but not all—of the nation's obligations when those exceptional measures expire.

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The Treasury Department would have to give some payments more consideration than others in order to avoid negative financial and economic repercussions if such a scenario were to materialize. According to records of a Fed meeting that were later made public, Federal Reserve and Treasury officials in 2011 devised a strategy to make timely payments on the debt while deferring other government obligations in the event that an agreement on the debt ceiling could not be reached. 

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Elsewhere, Republican legislators have supported legislation that would prioritize payments for veterans' programs, Social Security and Medicare recipients, as well as payments on the nation's debt.

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Democrats, though, are opposed to the strategy since it would lead to a reduction in government spending. Treasury officials have been warning for years that it might not be technically possible to prioritize payments.

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In an interview conducted last month, Treasury Secretary Janet Yellen stated, "You shouldn't assume it's operational and practicable to prioritize."

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Even prioritizing interest on debt, she asserted, "is not, by any stretch of the imagination, a surefire approach to avert economic and financial chaos." 

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Buy Defaulted Treasury Bonds from the Federal Reserve

Another possibility is that the Fed might enter the Treasury market, possibly by purchasing government bonds that have defaulted, though officials have advised against doing so. According to a meeting transcript from August 2011, Fed officials adopted this strategy with the presumption that payments on defaulted securities would most likely be made after a brief delay.

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How the central bank might respond in the case of default was a question that Fed chairman Jerome Powell was asked during a news conference earlier this month. He claimed that people shouldn't believe that the Fed can stop a broad economic downturn.

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"There is only one way out of this situation, and that is for Congress to raise the debt ceiling so that the US government can make all of its payments on time. And any veering from that course would be extremely perilous," he warned. "No one should think that the Fed can shield the economy from the effects of inaction quickly," the Fed stated.

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$1 trillion coin

According to a plan that was initially laughed off but later made its way to Congress, the Treasury could print a coin, say one worth $1 trillion, and deposit it at the Federal Reserve using obscure commemorative coin legislation. The Treasury might then withdraw funds from the Fed to cover the country's obligations.

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Yet Ms. Yellen has criticized the notion as a publicity stunt. She has previously claimed that by combining monetary and fiscal policies, the minting of a platinum currency would jeopardize the independence of the Fed. If the Treasury attempted to deposit a $1 trillion coin, Ms. Yellen warned that the Federal Reserve might not even accept it.

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She told the Journal, "I think especially with something that's a gimmick, it actually is not by any means to be assumed as a certainty that the Fed would do it. "There is no requirement on the side of the Fed for it to be accepted. They decide what to do.

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Previously, a spokesman for the Federal Reserve declined to comment on whether the institution would accept the coin.

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Release Petition

To circumvent any attempts by House Republican leadership to block specific votes on a debt-ceiling rise, several centrist Republican and Democratic House members are talking of dusting off a seldom-used parliamentary process.

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A discharge petition is used in this procedure, and it takes 218 signatures—or a majority of the House—to remove a measure from the committee and bring it up for a vote on the floor. In order for a debt-ceiling raise to pass the House, which is currently divided 222-212, a bipartisan group would have to force a vote on it. In order for the bill to pass, the Senate still needs to secure 60 votes.

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House Speaker Kevin McCarthy (R., Calif.) may use his own procedural procedures to reject it, so for the time being, leading House Democrats have delayed plans to utilize the procedural technique. Yet, Democrats have introduced at least one bill that, if necessary, might be used as a vehicle for a discharge petition for a debt limit agreement or any other piece of legislation that must be passed.