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.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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