The Greatest Disaster in American History

Can we avoid a debt crisis calamity, or is a global economic meltdown inevitable?

We are headed toward what may prove to be the story of the decade if the GOP’s’ recently revealed strategy on creating and managing a debt ceiling crisis comes to fruition. To understand why, remember three things: Financial markets function on stability, rapidly sucking billions in cash out of the economy would trigger a major recession or even a depression, and, if necessary, the Biden Administration has the power to end these periodic, intentionally created threats with an unprecedented, historic act.

The problem we are facing is that too many politicians simply do not understand that the global markets will never accept unsustainable political promises or multi-trillion-dollar gambles. Sophisticated investors for huge institutions and sovereign nations cannot be managed; what allows them to come to work every day without endless panic is that they understand the pillars of the global economy and anticipate that no one would pull those away intentionally.

The managers of these funds and institutions that play a huge role in keeping the global economy financially liquid all must answer to their bosses, which is why they are constantly looking over their shoulders, trying to anticipate what their colleagues are planning to do. And right now, those massive groups - Vanguard, Fidelity, TIAA-CREF, even China - have made it clear they believe the markets and the economy will collapse if the United States goes into unprecedented territory in this wholly unnecessary debt ceiling game.

Think of it like a bank run: If everybody runs to withdraw their money at the same time out of a fear that all their friends, neighbors, and other customers are preparing to drain their own accounts, the bank collapses. It doesn’t matter if the bank is in healthy financial condition if there is a belief that danger has emerged or is lurking ahead. The people with money in the bank will pull it out because the entire system functions on faith that the financial environment will remain stable.

Same thing goes for huge institutional investors: If the United States government does something foolish and unprecedented, they are not going to wait to see what others do - they are going to make a mad dash to the door, selling all they can while hoping to stay ahead of their competitors trying to push past them. The other thing to know is that these decisions are, for the most part, dictated by computers: When markets fall, trading programs kick in to minimize losses. Which means shooting as many sell orders as possible out there until the market calms.

This is where the Republican strategy, detailed in the Washington Post, will fail. The plan is to go ahead and hit the debt limit, then pick and choose what part of the government will be financed based on a listing of priorities. Interest on the debt is high up the list, according to the Post, which means that the Republicans are counting that as the only thing investors will examine to determine whether America defaulted. Next on the priority list are Social Security and Medicare, the military, a few other odds and ends, and that’s it. The rest of the federal government - the FBI, the SEC, Medicaid, air traffic control, everything - will shut down.

This financial plan fails on so many levels it is hard to know where to start. First, trillion-dollar investors are not simply going to check if they are getting their interest payments: the decision of whether the United States is in default will spread into everything. In other words, is the government no longer paying billions of dollars of outstanding bills to vendors? That effectively constitutes a technical default and would serve to notify the world that the country is perfectly willing to ignore paying its bills if some faction in the government finds it politically convenient. When hospitals start shutting down, first in rural areas, because they are overwhelmed by suddenly uninsured patients who lost their Medicaid. These people won’t stop getting sick, and under the law, they must be treated. So, the hospitals would see their capital sucked out, would default on their debt, and be gone. How long after that happens does the mantra in Washington become “We are sending billions to China in interest payments, but we are letting our own hospitals shut down!” What politician is going to be able to defend the loss of health care to entire communities - not just people on Medicaid, but everyone - while paying billions to Wall Street and foreign governments, regardless of whether they are interest payments?

This is the reality: Just because politicians agree to pay interest doesn’t mean that global investors will trust the politicians. They will see defaults building up around the country - student loan guarantees, hospital reimbursement, school systems, state and local governments, farm price supports, meat inspections - and see this as evidence that America is on the verge of becoming a failed state, unable to manage its own finances.

And then, take industry. With air traffic controllers no longer being paid, every airport in the country will shut down. The entire airline industry will grind to a halt, harkening back to the worst days after 9/11. Some airlines will go under. Others will be losing huge sums of money, forcing them to in turn lay off hundreds of thousands of employees, who then will have to massively cut back on their own spending, decreasing the amount they spend at retail stores, leading to firings of workers there, and on and on. Notice how easy it is to go into a death spiral from just one industry shutting down. Now, imagine that happening across the board as meat inspections stop (leading to huge cutbacks by consumers on consumption of beef, lamb, pork, and chicken, then crippling fast food restaurants), the ending of approvals of drugs and federal review of clinical trials, companies, and local governments no longer able to raise money in the markets because there is no Securities and Exchange Commission to review offerings. The IRS won’t even be able to process tax payments necessary for the ongoing funding of the government because there would be no IRS. The impact will roll into the economy, and once it starts, it won’t stop - even if Washington reverses course. Once you jump off a cliff, you can’t change your mind three seconds later.

Now, for a moment, imagine yourself in charge of a trillion-dollar investment fund. Are you going to wait to find out whether Washington will stop paying interest amid that political firestorm? Or are you going to rush for the exists? I know what any rational person would do.

Second, and maybe more important, it is singularly impossible to go through the federal budget line by line and figure out what will be paid and what won’t. During the self-created debt ceiling crises of 2011 and 2013 (these only occur when there is a Democrat in the White House and Republicans control the House; in every other circumstance, increasing the debt ceiling flies through without any controversy), the Treasury Department waved off this concept of prioritizing certain payments over others, simply because it is technically an unfeasible proposition. The government makes millions of payments every day; the House would have to figure out some way to pick through all those line-items of payments, write legislation to address each category, then get it passed. That would easily take a year - or might remain impossible forever, given it would be taking place as crisis looms and then disaster strikes. 

But for a moment, assume it is possible: the government could hold certain payments without problem, continue to function as a pay-as-you-go system without having any agency to collect taxes, industry could continue to function without traditional protections like air traffic control in place. In the best of all possible worlds, thirty percent of the federal budget will disappear, overnight. That is billions and billions of dollars, sucked out of an economy at a speed unprecedented in human history. And that spells disaster.

The economy can produce stuff because of four things: government purchases, public consumption, investment, and net exports. Without those, production of goods and services slows dramatically. In the game of debt limit chicken, the elimination of billions in government purchases will knock a huge leg out from under the economy, limiting industry’s ability to produce things. We are operating at a trade deficit, not a surplus, so we can’t turn to that. That leaves public consumption and investment. But already, with so much money out of the system just because the government stopped spending, banks will tighten up lending significantly based on uncertainty about how many loan defaults will be caused by the cash drainage. Public consumption will drop, and we already know that investment will be in the negative. This is a huge economic downturn, which would erode consumer confidence, causing them to reduce their spending even more, resulting in less investment spending by businesses seeing weakened demand for their products. Normally, this is where government would step in to fill the economy with cash. But in this situation, it was the government that triggered the collapse. 

The bottom line: This can’t be allowed to happen. No matter the politics, it cannot happen. Amid the wreckage, all that will remain is the blame game among politicians as the rest of the world struggles to recover from this self-inflicted catastrophe. Fortunately, the Executive Branch has one more tool in its arsenal - something that never has been done before and never should have to be done. But if we head toward default, there may be no choice.

The answer would be a platinum, trillion-dollar coin, minted by the Treasury, and use that to deal with the debt. The legal loophole comes through the Coinage Act, which gives the Secretary of the Treasury broad authority on the printing of coins. The Treasury can, at any time, order the United States Mint to coin a 1 ounce, one-trillion-coin coin. That would give the Treasury enough cash to avoid hitting the debt ceiling altogether, with no economic harm. 

This, of course, would set off rage from those who don’t understand the coin was necessary to avoid catastrophe. But there is one important argument: While taking this action is perfectly legal, it is also something that is required under the Constitution. The 14th Amendment, Section 4, specifically states that, “The validity of the public debt of the United States, authorized by law… shall not be questioned.” Certainly, hitting the debt ceiling because of inaction by politicians puts our public debt in question. We certainly couldn’t issue any more of it, and even if we could, no one would want to buy it. 

I hope we don’t have to get there. We must stop this perennial economic terrorism. If Congress wants to cut the debt, stop doling out tax cuts and spending increases. But that requires hard choices, and Washington doesn’t seem prepared to make them. So, we turn to this performative gimmick every few years, and one of these times, we will pay the price. Or, instead, mint a coin that would require a military regiment to transport it.