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5 Surefire Ways NOT to Resolve the U.S. Debt Ceiling Crisis

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For those of you still suffering from fiscal cliff-phoria, I'm about to burst your bubble.

Earlier last week, the United States hit its debt ceiling, approved in early 2012, of $16.394 trillion. Simply put, this means that the U.S. Treasury has lost its ability to borrow money, and if the limit isn't raised within the next two months, the U.S. will default on its debt obligations. Extraordinary measures have been implemented, which include halting investments in workers' retiree funds, in order to buy Congress roughly two months to get their act together.

Mapping a solution
If it seems like we just did this, it's because we have! We've raised the debt ceiling 78 times since 1960 and we seem to get an even more divided Congress with each new election. Members of Congress knew the fiscal cliff was coming nearly two years in advance, but it took months of bickering to come to a solution at the last possible second. I can only imagine what's in store for the looming U.S. debt ceiling debates.

While I don't have the perfectly mapped-out solution to resolving the debt ceiling crisis, I can tell you this much: It needs to be a joint effort, from both sides of the aisle, which encourages higher tax revenue and deeper spending cuts. The recently adopted fiscal cliff measure, known as the American Taxpayer Relief Act, should generate an additional $617 billion in revenue between 2013 and 2022 , but it's hardly made a dent in what's become very large annual federal deficit of $1.1 trillion. Personally, I'd like to see negotiations over the next few weeks turn to ways to reduce entitlement spending in order to close the deficit gap further from a spending perspective.

A bridge to nowhere
What I can tell you for certain is that there is no shortage of ideas coming out of left field with regard to dealing with the debt ceiling crisis. While all ideas are valuable, and two brains are usually better than one, I can say without a shadow of a doubt that these five ideas are a surefire way NOT to solve the U.S.' debt ceiling woes.

1. Dissolve the U.S. Treasuries' debt holdings
This glorious gem of advice was presented by former U.S. House of Representatives member, Ron Paul, in 2011. With $1.6 trillion in bonds on its balance sheet at the time, Ron Paul actually suggested that the U.S. Treasury dissolve, burn, or cancel the entire sum of bonds as it would remove $1.6 trillion from the debt ceiling and give both parties nearly two years to come to a future debt ceiling agreement.

Oh where to begin... First of all, since when has a two-year period prevented a near impasse? Lawmakers knew about the fiscal cliff for two years and they still hardly came to an agreement in time. Secondly, if you wipe out the Treasuries' debt, it'll lose the ability to tighten monetary policy in the future by swapping its debt holdings for excess cash in the banking sector. Finally, dissolution of what's now become nearly $3 trillion in bonds would be nothing more than a debt default to ratings agencies worldwide and could send interest rates soaring. Thanks but no thanks, Ron Paul! 

2. Mint a $1 trillion coin
One idea that's been circulating around the web for better than a year is for the U.S. Treasury to invoke a rarely used law that allows it to print platinum bullion and coins of any denomination of its choosing. Normally the Federal Reserve is the sole money printer in the U.S., but the U.S. Treasury could use U.S. law 31 USC 5112 to print a $1 trillion coin and legally subvert the debt ceiling.

While this may be on par in wackiness with Ron Paul's idea, it's at least a tad bit more feasible, yet still very unrealistic. Minting a $1 trillion coin would likely yield short-term rapid inflation as the money supply drastically increases. Some arguments have stated that a reverse quantitative easing, where the Fed unloads its bonds in exchange for cash, could help curb the coins' inflationary effects , but I'd be more concerned about investors long-term implications and assumptions that the U.S. Treasury can just mint $1 trillion out of thin air at a whim. $1 trillion coins are best left to the fictitious Scrooge McDuck!

3. Tie Congressional tenure with their ability to shrink deficits
We at The Motley Fool often praise Warren Buffett, the Oracle of Omaha, for his brilliant ideas and transparent views of the world, but his suggestion that he could solve the U.S. debt-ceiling crisis in five minutes had me shaking my head in disdain. Buffett said, "I could end the deficit in 5 minutes. You just pass a law that says that anytime there is a deficit of more than 3% of GDP, all sitting members of congress are ineligible for reelection." 

While this may sound legit -- and you won't find a Congressman who'd publicly say they'd vote against it -- when push comes to shove, this is a proposal that would never, ever find its way into law. You find me a Congressmen that will put his job on the line and base that job on the ability of two parties to come together to balance a budget, and I'll show you a purple flying unicorn! This is a utopian idea that's simply not attainable.

4. Invoke the 14th Amendment to declare the debt ceiling unconstitutional
Over the past year and change, both former President Bill Clinton and House Minority Speakers, Nancy Pelosi, have expressed support for using section four of the 14th Amendment to skirt the debt ceiling crisis. As stated by section four, "The validity of the public debt of the United States, authorized by law, including debts incurred for payments of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned." In theory, this should give President Obama the ability to declare the debt ceiling unconstitutional and blow right past Congress' imposed $16.394 trillion limit.

Thank goodness this is nothing more than a whimsical theory at the moment. This law was constructed during the Civil War and its meaning of "debt" back then is drastically different than what it is today. Furthermore, if President Obama were to circumvent Congress and raise the debt ceiling on his own, it's extremely likely that lengthy court battles would ensue, and many of the U.S.' creditors would simply stop lending to us. It appears we can breathe a sigh of relief as this plan isn't currently on President Obama's plate, according to The New York Times.

5. Do nothing
Finally, doing nothing could be the most damaging outcome of all! If Congress fails to reach some sort of debt ceiling deal prior to the Fed's extraordinary measures buffer, taxes will again rise dramatically, and drastic spending cuts would need to be enacted.

According to a report by the Congressional Research Service in Feb. 2011, in order to simply make ends meet two years ago, taxes would have needed to go up by two-thirds, while entitlement spending on Social Security and Medicare would likely have dropped by up to 70%. Worse yet, that would only have gotten the U.S. government through 2011, and it forecast steeper cuts and more taxes in 2012. Doing nothing is simply not a feasible option.

Phishing for a solution
If two brains are better than one, let's put our collective thoughts together: Share your solution for resolving the debt ceiling debacle in the comments section below. 

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Editor's note: A previous version of this article said that the U.S. Federal Reserve, rather than the U.S. Treasury, had lost its ability to borrow money. The Motley Fool regrets the error.

Read/Post Comments (20) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 09, 2013, at 10:36 AM, RodneyStrong wrote:

    "...if the limit isn't raised within the next two months, the U.S. will default on its debt obligations." Really? The government has plenty of revenue coming in to service it's debt. Spending cuts will be necessary, sure, but do we really need the scare tactic to make things more dramatic? When are we going to elect serious adults that are capable of solving problems rather than adolescents that need a playground monitor.

  • Report this Comment On January 10, 2013, at 6:16 PM, TMFMorgan wrote:

    <,The government has plenty of revenue coming in to service it's debt. >>

    Two things:

    1) It's not clear that the Treasury can prioritize payments to ensure interest is paid while others (say, Social Security) can be stiffed. Geithner has implied that bills will be paid on a first-come, first-serve basis. So there is a chance interest payments would be missed.

    2) Paying debt principal means having to borrow more. Some months the Treasury has to roll over upwards of half a trillion dollars in debt. It does this now primarily through issuing Treasury bills. If there is a default on the Treasury market loses confidence, it's not at all clear that it would be able to continue rolling debt.

  • Report this Comment On January 11, 2013, at 11:18 AM, TMFMorgan wrote:

    <<Furthermore, if President Obama were to circumvent Congress and raise the debt ceiling on his own, it's extremely likely that lengthy court battles would ensue>>

    To add: If congress doesn't pay defense contractor invoices, tax refunds, salaries, social security checks, Medicare payments, interest on the debt, etc., it's extremely likely that lengthy court battles will ensue.

    Krugman wrote this morning: "The president will be forced to break the law, one way or another; either he borrows funds in defiance of Congress, or he fails to spend money Congress has told him to spend."

  • Report this Comment On January 11, 2013, at 11:34 AM, XMFGortok wrote:

    Or, we could live within our means. But that's taboo in a post-modern Keynesian world, isn't it?

  • Report this Comment On January 11, 2013, at 12:33 PM, mdk0611 wrote:

    "Geitner has implied". Think there were any politics involved in making that implication?

    We just raised $600 billion in revenue over 10 years. Virtually every bipartisan commission out there has said there needs to be 2:1 or 3:1 in spending cuts/entitlement reforms vs. revenue increases to correct the problem. Maybe this time Congress can do a little of that. But Reid's reaction to the proposal for chain indexing of Social Security makes me very pessimistic.

  • Report this Comment On January 11, 2013, at 12:44 PM, DMCSween wrote:

    "If congress doesn't pay defense contractor invoices, etc. etc.".... can we please call it for what it is...we are not "Paying" anyone by raising our debt ceiling. We are merely swapping one debt for another - like "paying" the Visa bill with a Mastercard! This is just another example of kicking the can down the road....only the can keeps getting bigger and the eventual pain will be much greater.

    What can be done to stop Congress from spending more and more on bills that they don't have any means to pay for. We are living in a fantasy world where current actions have no future consequences!

  • Report this Comment On January 11, 2013, at 12:55 PM, GordonsGecko wrote:

    If "lawmakers" are unwilling to put their jobs on the line to do the right thing and solve actual problems, rather than kicking the can down the road and only doing enough to get re-elected...then it is truly a sad state that our government has become.

    Not that this is news to anyone....

  • Report this Comment On January 11, 2013, at 1:19 PM, DMCSween wrote:

    I believe that saying:"...if the limit isn't raised within the next two months, the U.S. will default on its debt obligations..." is not accurate. The U.S. takes in enough taxes to service it's debt obligations. Problem is, the U.S. has other obligations that it chooses to prioritize over it's debts. The government can make cuts elsewhere and service our debts just fine. Unfortunately, cutting in other areas would not be wise for re-election purposes.

    Most of us adults make hard choices every day and have learned to say "No, I can't afford that right now...I have to pass." Our leaders in Congress on the other hand refuse to make such difficult decisions and like to say "Yes" to every opportunity to spend $ - even when they don't have the $ to spend!

  • Report this Comment On January 11, 2013, at 1:41 PM, pondee619 wrote:

    Our leaders in Congress refuse to so no to excess spending; Lawmakers are unwilling to put their jobs on the line to balance the budget; what can be done to stop Congress from spending; Congress won;t do this, the resident won't do that, kick the can down the road,hold them accountable, vote the b$#@! out:

    Folks, We the People just re-elected these B%$#@. Stop complaining and enjoy the government we wanted. We'll get another chance in two years. I'll bet we'll re-elect the B$#@! again.

  • Report this Comment On January 11, 2013, at 1:47 PM, mill3417 wrote:

    I spoke to a few of my colleagues and one of them told me that the current debt debacle that our country is in can be solved if everyone and everything is taxed properly, that includes all capital in foreign accounts. Everyone, not just congress, has to be willing to help out the country that gave them the opportunity to live whatever life they chose to live in its, our, time of need.

  • Report this Comment On January 11, 2013, at 2:03 PM, milangirl77 wrote:

    Buffet's suggestion is the best of the bunch. The most likely way this issue will be addressed is through a VAT. We can't avoid it. Revenue has to be raised because spending won't be cut enough to cover ourselves. I say within 10 years. 15 at most.

  • Report this Comment On January 11, 2013, at 2:16 PM, mcampbell8 wrote:

    The Fed came up with 9 trillion dollars to bail out the banks. I think the Fed can come up with 5 trillion, or 3 or 2 to meet the current needs. Would they come to the aid of the U.S. government like they did for the financial institutions? If not, they should be eliminated. But the big question is how do you keep the government from doing it again?

  • Report this Comment On January 11, 2013, at 2:49 PM, NickD wrote:

    What about all those tips jobs those guys making 10-20 a hour in tips not paying a % in taxes on it please that about 500 billion a year free money

  • Report this Comment On January 11, 2013, at 2:54 PM, Foosballking wrote:

    With regards to the insipid comments suggesting the need for new taxes - every time taxes are raised or a bailout plan is implemented, NOTHING ever happens to change the behavior of what got us in trouble in the first place. The whole budgeting process itself if a fraud. It's set up to automatically invoke increases every year. If there are recommendations to just reduce rates of come the socialists (i.e. democrats) with the support of the fools in the media making ridiculous claims about people starving or no police or firemen (which aren't funded federally in the first place). This is immediately countered by spineless republicans who won't take the time or effort to educate the uninformed on what really is happening. So - profligate spending continues - at a deficit rate of over $100 million per month. And then we get (what should be considered criminal) dishonest claims about how we're not taxed enough. For those that believe that fantasy - I would ask - why aren't you stroking a check that's for more than your required tax burden????

  • Report this Comment On January 11, 2013, at 3:13 PM, mstick99 wrote:

    not to be too pedantic but you print money and strike coins. coins aren't printed.

  • Report this Comment On January 11, 2013, at 3:18 PM, hbofbyu wrote:

    God bless Keynesian theory.

  • Report this Comment On January 11, 2013, at 3:23 PM, jasenj1 wrote:

    The "fiscal cliff" deal has shown that Congress will not act unless there is imminent threat of terrible consequences. Negotiation, give and take, holding your nose/pride and letting the other guy get something he wants are not in their vocabulary.

    I say print the coin and watch the fireworks. Congress is not doing their job. THEY are (or have) ruined this country's fiscal situation. My grandchildren will be paying for the spending spree these yahoos have been on.

    Congress will pass no laws that hurt their chances of reelection, or inconvenience them personally in any way. They will fiddle while Rome burns.

    Maybe the President could prioritize all other payments ahead of Congress' salary, health benefits, and pensions. When the debt is gone, he can start paying them again.

  • Report this Comment On January 11, 2013, at 3:45 PM, DMCSween wrote:

    Wonder what would happen if we passed a law that said we must service our debt first and then pay all other domestic bills (salaries, SS, Medicare, etc) second with whatever was left. I'll be we would not be so willing to run up our debt so fast if it meant WE might not get paid....

  • Report this Comment On January 11, 2013, at 4:24 PM, willisreed17 wrote:

    The only long term solution to getting the debt under control is to hold all areas of the government to the same standard that every successful business is held to. No dollar should be spent without question. Cut the fat out, get more economical, and streamline processes. This would allow the government to save some money while maintaining or even improving the services that the people are unwilling to give up.

  • Report this Comment On January 11, 2013, at 4:54 PM, whereaminow wrote:

    I'm pretty sure if you click on your article about Ron Paul's idea the comment section has plenty of counter arguments to your three points.

    I don't expect you to ever change your Keynesian position, but that there is disagreement is generally considered professional.

    Finally, I would like to point out that there is no need to tighten monetary policy if you didn't loosen it in the first place. And there was no need to loosen it.

    As evidence, I submit every single panic in American history prior to the creation of the Federal Reserve (of which, at least one was a sharper contraction than 1929-1931), all of which recovered to normal business activity within 18 months without government intervention, including loosening of monetary policy.

    The problem isn't Ron Paul. It's the idea that you can Soviet-style centrally plan economic booms and busts through a technocratic bureaucracy that attempts to determine interest rates, rates that should be determined by the peaceful cooperation of savings and borrowers.

    David in Liberty

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