Several people have asked me for my view of Matt Levine’s idea that the Treasury Department could evade the debt ceiling by issuing “super-premium” bonds. Basically you sell a bond with a $100 face value, but price it at $225. That way you’re raising extra money without increasing the quantity of outstanding principal. Why would you pay $225 for a $100 bond? For the same reason you’d pay $100 for a $100 bond—to get the interest. Presumably a higher interest rate would be demanded for the overpriced bond, which would be unfortunate, but a lot better than a default.
This is very clever and definitely belongs on the list of workarounds alongside platinum coin seigniorage and various constitutional dictates.
But what officials in the Treasury and the White House will tell you is that all three of these workarounds have the same basic big problem with them—they’re bound to set off an avalanche of litigation and uncertainty about what’s really what. Now I think you can overstate this. For perfectly normal bargaining purposes, the administration doesn’t want to get into detailed discussions about fallback plans. But the downsides of any of these options seem small relative to the downsides of flipping the “off” switch on all the federal payment systems and letting the national economy collapse. The really big problem with these workarounds is just that they’re so clearly worse than nice, clean, simple congressional action. Maybe the workarounds would “only” lead to a small and semipermanent increase in U.S. borrowing costs and a brief moment of financial panic that the Fed easily smoothes over. Or maybe the workarounds would really fail in some big way and prompt a confusing run on money-market funds and force the government to field-test emergency response measures while simultaneously dealing with large-scale furloughs. We don’t really know. It might be OK, it might be pretty terrible.
What’s clear is that any of the workarounds is obviously inferior to Congress doing the right thing, and obviously superior to letting the statury debt ceiling simply trump all the other obligations of the United States.