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Yet again the farce called `debt ceiling is upon the US kicking off the latest episode of another high voltage drama playing out in full public view in the nation’s capital Washington. Not surprisingly, going by the mainstream US media commentaries, who incidentally see red in anybody else’s budget crisis, the American public was neither concerned nor anxious about the latest episode of the routine impasse. The reason is not hard to explain. Everyone in the US and perhaps elsewhere know that the world’s largest economy cannot afford to default or go back on its payment obligation. This is all the truer when the US is waging a proxy war in Ukraine and talk about a looming recession getting louder and louder and the deep cut in jobs by the Big Tech and Big Finance is staring at the US working class. Then why the hullabaloo? For most of the respected commentators on the US economy, the hue and cry about the debt ceiling is much ado about nothing. Why because a cursory reading of the US economic history shows that every nine out of ten years in the past, the US had hit the debt ceiling and got away with it but for one instance in 2011. They view the ongoing noise around the US debt ceiling as more of political in nature and color than anything to do with economics or public finance. And many are of the view that the House (the US House of Representatives or the lower House of its parliament.) will ultimately increase the debt limit of the US Federal Government but after a hard bargain between Joe Biden’s Democratic dispensation with the Government making concessions to cut medical aid other social security support for its poor citizens. (True that the world’s richest nation too has its share of poor people mostly blacks, colored and Hispanics). Before going any further, it may be better to have some context. What is the US Debt Ceiling? The drama of this year unfolded when the US treasury secretary Janet Yellen informed the US Congress that the federal Government had hit its debt limit last week and urged the law makers to reach a consensus to avoid a Government shutdown. This has set in a chain of events that have more to do with political exigencies rather than sound economics. For the uninitiated, here is an explainer about debt ceiling, The debt ceiling or debt limit is a cap on the total amount of debt that the federal government is authorized to run to fulfill its financial obligations. As one commentator put it “Because the United States runs budget deficits — meaning it spends more than it brings in through taxes and other revenue — it must borrow huge sums of money to pay its bills. That includes funding for social safety net programs, interest on the national debt and salaries for troops. The debt ceiling debate often elicits calls by lawmakers to cut back on government spending, but lifting the debt limit does not authorize any new spending and in fact simply allows the United States to finance existing obligations”.



<figure class="wp-block-image size-large"><img src="https://malabar-journal-images.s3.amazonaws.com/content-images/UD-Frdal-vca.jpg" alt="" class="wp-image-17941"/><figcaption class="wp-element-caption">United States Capitol | Photo: Twitter</figcaption></figure>



Simply put, the US Federal Government can finance its expenditure by deepening its debt stock by directing the treasury to issue any type of instruments it chooses to foot in the bill run up by the government. Since the treasury has the statutory obligation to meet all the payment obligations of the Government, in case of any stalemate it can play the ace up its sleeve; the $1 trillion Platinum Coin it can issue with the stroke of a pen to raise money to avoid the so-called Government shut down. Since the Platinum Coin is a currency, and not a debt instrument, it is considered as the last resort of the lender of the last resort, that is the US treasury, to keep the US Government solvent or nit defaulting on payments that are mandatory. More often than not it is set the stage for a hard bargain between the political parties from either side of the spectrum and ultimately ends up in a resolution based on give some, take some principle. That is to say the US Government can hardly be a defaulter. Don’t Think the Unthinkable To think that the US Federal Government is on the verge of a default is akin to thinking the unthinkable. This is pretty evident from the US economic history since 1917 when the statutory debt limit came into force with the passing of Second Liberty Bond Act of 1917. For those skeptics here are some facts. The US has increased its debt limit 85 times since 1959. Each time, the Congress and the President ultimately struck a bi-partisan agreement. And always, the delay was strictly political. During Obama‘s presidency, Republicans withheld raising the debt ceiling in an unsuccessful bid to force the administration to abandon the Affordable Care Act better known as Obamacare. In 2006, during the George Bush presidency, then-Senator Obama voted against raising the debt ceiling as a political statement against financial irresponsibility.



Where Debt is Not a Problem For the US, unlike any other nations, piling up of public debt is not a problem at all. Rather it can swim in debt with impunity. Going by the latest number, the public debt of that country stands at a staggering $31 trillion or approximately 125 % of the size of the country's economy. That is equal to the combined nominal GDP of China, Japan, Germany, the United Kingdom, India and France. Why can the US have the debt cake and eat it too. Here are the reasons. The US treasury is in an enviable position of being able to issue new debt whenever it wants. This is because American Treasury bills or securities have been viewed as one of the safest, most stable investments in the modern world. In times of economic turbulence, US debt is a safe haven amid the economic storm. If the US issues new government debt in the form of Treasury bonds, bills, notes or securities, there are ready buyers, both in the US and abroad. Then why talk about a crisis? This is what noted, economist, James K. Galbraith, chair in government-business relations at the Lyndon B Johnson School of Public Affairs at the University of Texas has to say about the whole episode “We are getting set to avert a fake crisis by creating a real one—for retirees, for the sick, for law enforcement, for the economy, and (of course) for all those hated regulatory agencies that haven’t yet been destroyed. That danger is real. The debt ceiling? It’s just a ruse and a trap”.



<figure class="wp-block-pullquote"><blockquote>“Finally, here’s a real magic trick. Treasury Secretary Janet L. Yellen is fully empowered to issue a platinum coin in any denomination that she decides. The law granting this authority was enacted in 1997 by a Republican Congress. Yellen can order the US Mint to issue a trillion-dollar coin, with which the Treasury can buy back a trillion dollars of Treasury debt held at the Federal Reserve. Since a coin is not debt, the debt would fall below the ceiling with the stroke of a bookkeeper’s pen. There would be no economic consequences; the world outside the Federal Reserve and Treasury would be unaffected. Whose face should appear on the coin? McCarthy’s comes to mind.”</blockquote></figure>



When a Crisis is Not a Crisis … So is there any crisis called the US debt ceiling. It is better to listen from the horse's mouth than to make any comments. To cite the widely quoted words of Paul Van de Water of the Center on Budget and Policy Priorities: “If the (US) government couldn’t borrow, it would need to impose sharp, massive reductions in spending, which would have devastating (and would have) economywide consequences. Some households, businesses, and nonprofits would be unable to pay their bills while they waited for payments the government legally owed them. Cuts in grants-in-aid would strain the budgets of state and local governments. Such a large drop in spending would plunge the nation into recession and drive-up unemployment.…Moreover, the government’s inability to pay all its bills would shake financial markets around the world. It would raise serious doubts about the nation’s creditworthiness, zap the confidence of lenders, call into question the dollar’s place as a reserve currency, and increase federal borrowing costs.” … And it is a Farce But Galbriath demolishes this argument lock, stock and barrel. According to him, such a thing called the US Federal Government shut-down can never happen because of the following reasons. To quote him verbatim: First, a failure to raise the debt ceiling does not override any legal obligation to spend. True, the debt ceiling is written into law. But so are Social Security, Medicare, Medicaid, interest payments, and every other mandated or appropriated form of spending. The US Treasury must follow the law. Debt ceiling or no, it cannot legally default on any obligation. “Second, the Treasury has no legal authority to single out Social Security or interest payments or anything else for cuts, and – so far as I know – it couldn’t stop those payments if it wanted to. The Treasury makes millions of payments every day. The last time I checked (during Barack Obama’s presidency) the software needed to stop them had never been authorized and did not exist. So far as I know, it still does not exist. Why would it? Social Security has never once missed a payment. “Third, if the Treasury somehow did delay paying some bills, most businesses, governments, and households would just carry on – knowing perfectly well that the cutoff would be short-lived. If necessary, most could borrow for the short term – that’s what banks and credit cards are for. Life would not end, and in most cases, it would barely slow down. “Fourth, the Treasury does not need to issue debt to spend. Like all governments, it spends by writing checks. It does not raise the money first by issuing bonds. Rather, it issues bonds to provide private investors with a safe interest-bearing asset in exchange for the cash it just created by writing checks. If it decides to stop issuing bonds (because of the debt ceiling), that’s a problem for private investors, not for the government, despite what top government officials may say.



“Finally, here’s a real magic trick. Treasury Secretary Janet L. Yellen is fully empowered to issue a platinum coin in any denomination that she decides. The law granting this authority was enacted in 1997 by a Republican Congress. Yellen can order the US Mint to issue a trillion-dollar coin, with which the Treasury can buy back a trillion dollars of Treasury debt held at the Federal Reserve. Since a coin is not debt, the debt would fall below the ceiling with the stroke of a bookkeeper’s pen. There would be no economic consequences; the world outside the Federal Reserve and Treasury would be unaffected. Whose face should appear on the coin? McCarthy’s comes to mind.”



<figure class="wp-block-image size-large"><img src="https://malabar-journal-images.s3.amazonaws.com/content-images/Professor_James_Galbraith_.jpg" alt="" class="wp-image-17943"/><figcaption class="wp-element-caption">James K. Galbraith | Photo: Wiki commons</figcaption></figure>



Fake Crisis and Key Learnings for Us The politically precipitated Budget crisis in the US comes at a most propitiate time for India as the world’s most populated nation to be is all set to get another annual Budget on February 1st. Taking a leaf out of the US national accounting, where a fiscal glide path ever existed, the Finance Minister of the fifth largest economy in the world should prudently ditch the temptation about shrinking Government expenditure and go on putting money for more people centric programs. The Honorable Finance Minister should be guided by the popular mandate for her Government by increasing allocation for key sectors like education, and health to make these public goods available for the multitudes. The Budget should also extend the free foodgrain for the poor so that no one goes to bed without at least one square meal a day and our children should not suffer from malnutrition. This is all the more important in the wake of a cost-of-living crisis that is slowly but surely unfolding with prices of everything from food to healthcare zooming to unaffordable levels. For one, ever since the economy emerged from the Covid-19 pandemic the health inflation or the cost of medical care has jumped nearly 50 per cent. Similarly, the higher cost of cereals and vegetables are pushing more and more people into the trap of poverty. So, for a change this time around, may the Finance Minister table a Budget for the people keeping the three cardinal principles of public finance - the efficient allocation of available resources, the distribution of income among citizens; and the stability of the economy – top of her mind. There are reasons for the Finance Minister to do so. True that Indian Rupee does not enjoy the so-called safe haven status of US greenback. Still the Finance Minister of the 5th largest economy in the world can show the courage by not heeding to deficit hawks and fiscal fundamentalists. Will she or won’t she. Let us wait till February 1st.