The coin and the IOUs

For the last several days a number of possible solutions to the debt limit poped up in the blogosphere.

The $1 trillion coin.

Pros: It’s a simple and elegant solution to circumvent the Republicans in Congress. No act of congress needed to mint it and the value assigned to it is at the sole discretion of the Treasury.

Cons: The PR perspective. Republicans will not forget it and will use “a trillion dollar coin” as a bludgeon to hit Obama again and again as an irresponsible drunken sailor who has the powers of the Dark Lord Sauron. Minting this coin is already compared to “one ring to rule them all”.

The I.O.Us.

I just read about it this morning and I like it even more than the coin.

Pros: It still achieves the desired effect – government continuing payings it’s bills, but without the hysteria that can accompany the minting of the coin. An IOU is what it is – a piece of paper issued by the US government guaranteeing the full payment if US resolves the debt limit. It’s a temporary facility but that can be extended indefinitely. IOUs will probably be issued at a small discount and will be available for trading on the private market. I’m sure Wall Street will be thrilled about this new instrument. It will be harder for Republicans to portray it as something outrageous, because Dems will always be able to point out that we’re paying the bills they have already passed and they are not technically incurring any new debt.

Cons: I can’t think of any.

Of course, there’s another way – the 14th Amendment that states “the validity of public debt of the US shall not be questioned”. But it was explicitly ruled out by the Administration.

If US hits the debt ceiling and no solution is found it will be unprecedented because a country will default for non-economic reasons. When S&P downgraded US credit rating after the original debt ceiling debacle in August 2011, it stated that their reasons for downgrade was political gridlock, not economic inability to pay. I wonder if Republican Wall Street donors will be more attuned to the situation than they were in the summer of 2011 and realize the Congress doesn’t care about their positions, their clients and their portfolios. At this point they only care, as they go down, to bring Obama with them.

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