NYCSOUTHPAW

"In the end it all comes down to talent." -Sandy Koufax

The New York Times has a Very Serious Proposal for a Shadow Currency

USC tax law professor Edward Kleinbard thinks that minting the platinum coin is “fantastical,” and he has a Very Serious alternative proposal:

There is a plausible course of action, one that the president should publicly adopt in the coming weeks as his contingency plan should debt-ceiling negotiations falter. He should threaten to issue scrip — “registered warrants” — to existing claims holders (other than those who own actual government debt) in lieu of money. Recipients of these I.O.U.’s could include federal employees, defense contractors, Medicare service providers, Social Security recipients and others.

The scrip would not violate the debt ceiling because it wouldn’t constitute a new borrowing of money backed by the credit of the United States. It would merely be a formal acknowledgment of a pre-existing monetary claim against the United States that the Treasury was not currently able to pay. The president could therefore establish a scrip program by executive order without piling a constitutional crisis on top of a fiscal one.

To avoid any confusion with actual Treasury debt, and to be consistent with the law governing claims against the United States more generally, the scrip would not pay interest in most cases. And unlike debt, it would have no fixed maturity date but rather would become redeemable in cash only when the secretary of the Treasury was able to certify that there’s enough money available in the Treasury’s general fund to cover it.

Finally, the scrip would be transferable, allowing financial institutions to buy it at a high percentage of its face value, knowing that the political crisis would almost certainly be resolved before long.

Short version: Let’s postpone paying back our debts with a no maturity, zero coupon, federal IOU that President Obama creates by executive order.
A couple thoughts on this: 
  • Kleinbard’s IOUs are probably a whole new fiat currency. They would be perpetual obligations of the government that are freely transferable and earn no interest—just like the bills in your wallet.  
  • Coining money is one of Congress’ constitutionally enumerated powers, so the executive branch would face pretty heavy judicial scrutiny if it just popped off and exercised that power for its own purposes. Encroaching on Congress’s powers without statutory authority is much shakier legal ground than simply using explicit statutory authority. (Harry Truman learned this the hard way.) 
  • (By the way, I can’t understand why Kleinbard says, later in his piece, that his scrip program “would not explicitly challenge any constitutional allocation of powers.” Of course it would! Even if you don’t believe anything I wrote above, getting around Congress’s debt ceiling by executive legerdemain is the whole game here.)
  • Kleinbard’s idea is to evade the debt ceiling by executive order—with no pretense of Congressional authorization. Proponents of the platinum coin, by contrast, are suggesting the executive use his clear authority under an existing (arcane!) statutory grant to circumvent the debt ceiling. An enormously valuable coin may seem a little silly, but there’s no question that using statutory authority is going to be a much more defensible position in court. 
In any case, Kleinbard is proposing that we attempt to pay back dollar denominated obligations with something other than dollars on the table.  That something is going to be either:
  • a brand new—awfully sketchy—currency, or 
  • an IOU that says, in effect:
Dear U.S. Creditor-
There’s no money for you today. Perhaps there will be later. I’ll call you.
-Uncle Sam

PS No more interest for you! 
PPS You might now be subordinated to my other creditors. 
Kleinbard needs to explain to us why either one of those scenarios doesn’t amount to a flat-out default.