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The Debt Ceiling Drama: Options and Implications for Investors

Treasury Secretary Janet Yellen recently warned that the US government might run out of cash to cover its expenses as early as June 1st, as the current $31.4 trillion borrowing cap has already been reached. Congress has the power to prevent a looming economic catastrophe by authorizing more government borrowing, allowing the US to continue paying its bills and avoid an unprecedented default on its financial obligations. However, this issue has turned into a game of chicken between the political parties.

Republicans in Congress are demanding budget cuts in exchange for increasing the debt limit. The GOP-controlled House passed a bill proposing to raise the borrowing cap while slashing government spending by around $3.2 trillion over 10 years. However, this bill faces strong opposition in the Democrat-led Senate, which insist on raising the debt limit without any strings attached.

Failure to address the debt ceiling could force the Treasury into a series of extremely difficult choices, such as delaying payments to federal contractors and Social Security recipients. Economists concur that defaulting on payments would send global financial markets into a tailspin, trigger widespread unemployment, and damage the US’ reputation as a trustworthy borrower.

With no agreement in sight, various unconventional solutions have been proposed to raise the debt limit without relying on Congress:

1. The 14th Amendment Approach

Some commentators suggest invoking a clause in the 14th Amendment to the Constitution, which affirms the sanctity of public debt. This would allow the Federal government to continue borrowing to pay its existing creditors without requiring congressional approval.

2. The $1 Trillion Platinum Coin

Another peculiar proposal involves the Treasury minting a $1 trillion platinum coin. Despite seeming far-fetched, prominent economists have shown support for this idea. However, Secretary Yellen dismissed it as a “gimmick.”

3. High-Interest Government Bonds

Nobel Prize-winning economist Paul Krugman advocates for issuing government bonds with exceptionally high interest rates and selling them at a premium. This method would replenish the Treasury while keeping on-paper debt below the limit.

Should We Abolish the Debt Limit?

Economist Justin Wolfers argues that the concerns surrounding the government’s creditworthiness resemble those of lending money to a constantly bickering divorcing couple. While he acknowledges that worrying about national debt is valid, he believes that imposing a limit on borrowing to cover expenses the government has already committed to is not the way to address it. Wolfers suggests abolishing the cap altogether.

For now, Americans and investors alike must wait and watch as lawmakers negotiate a solution that hopefully doesn’t jeopardize the economy.