Thursday, January 10, 2013
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.