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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, January 10, 2013

Kleinbard: The Debt Ceiling’s Escape Hatch

New York Times op-ed:  The Debt Ceiling’s Escape Hatch, by Edward Kleinbard (USC):

The gist of the idea is to issue scrip ("registered warrants," technically, or IOUs, colloquially) to holders of money claims against the US government, other than owners of Treasury securities; the latter would continue to be paid in cash. The scrip would be freely assignable, so claims holders that get scrip would be able to sell it at a modest discount in private markets to financial institutions, because rational institutions will be comfortable that the crisis will not go on for long. As a result, claims holders will be able to "monetize" their claims through private sector sales, even while the government is precluded from borrowing money to pay them directly.

Unlike other ideas, the scrip proposal is plainly constitutional. The scrip does not run afoul of the debt ceiling, because the debt ceiling simply precludes the Treasury from raising new cash by issuing Treasury bills, notes, bonds and other debt instruments. Unlike debt, the scrip would pay no interest and have no fixed maturity date; instead, it would be payable in cash only when the Treasury announced that it had the cash available in its general fund (presumably through a resolution of the debt ceiling crisis and new borrowings by the Treasury). Moreover, the scrip would not be a cash raising mechanism for the government, but instead would simply evidence the existence of claim holders' preexisting claims. Whatever cash they receive would come from other private sector actors who were willing to buy the scrip in secondary market transactions.

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Rather than following in the footsteps of California, perhaps the US government should pay attention to an SNL skit with Steve Martin called "Don't Buy Stuff You Can't Afford" . . .

Posted by: daniel | Jan 10, 2013 4:59:10 AM

Are you sure we're not living "What the Hell is That?"

Posted by: Sandy P. | Jan 10, 2013 8:31:47 AM

All of these too-clever-by-half "work-arounds" (what exactly are these worthies trying to work around - the evil separation of powers in our democracy?) are simply pathetic confessions of failure by a political class that is impotent to accomplish anything other than the endless debauching of our currency/savings.

All of this toy trillion-dollar coin and Weimar scrip crap simply highlights the utter arbitrariness with which the Left feels it can treat the earnings/savings of others.

There is a *reason* why gun sales are through the roof - the increasingly capricious (and frankly insane) policy prescriptions of the Left.

Posted by: cas127 | Jan 10, 2013 8:46:23 AM

Given the destruction of the U.S. dollar and our country's finances, maybe there really is something to the old joke, "Save your Confederate money, boys. The South shall rise again." Tag

Posted by: Woody | Jan 10, 2013 9:26:55 AM

California has issued "warrants" (non-tradeable IOUs) when it ran out of money in past years. This idea is very similar.

Posted by: AMTbuff | Jan 10, 2013 12:22:01 PM

This idea is just another way of inflating the U.S. money supply so as to devalue sovereign debt and hide the unwillingness of the political class to rein in government spending. Evidently the Times thinks it can publish such hogwash because most of its subscribers are too young to remember the runaway Carter-era inflation.

Posted by: Jake | Jan 10, 2013 12:31:50 PM

For years the Treasury has been postponing its planned discontinuance of paper checks. It's not yet all direct deposit, but close to it. So how do you transfer warrants to millions of Social Security recipient bank accounts? Would the banks agree to accept them? In California, as I recall, some banks started discounting them, if not refusing them.

For maintaining minimum capitalization requirements, will bank regulators accept Treasury IOU's as cash equivalents?

Posted by: Bob | Jan 11, 2013 7:50:39 AM

I'm in favor of this. But only for meeting the federal payroll.

Posted by: gregger | Jan 11, 2013 10:20:55 AM