Dear readers,

You may have seen in the news that this week, Treasury Secretary Janet Yellen will be commencing the use of “extraordinary measures" to avoid hitting the debt limit. In theory, we should be hitting the debt limit right about now; in practice, Treasury has a bag of accounting tricks up its sleeve that mean the limit won’t become binding until sometime probably this summer.

For example, there are ordinarily hundreds of billions of dollars of government bonds held in an investment fund — the “G Fund” — for federal employees and retirees. These bonds are a real obligation of the government — they’re needed to finance eventual retirement payments to federal workers — and they ordinarily count toward the debt limit. But when Treasury implements “extraordinary measures,” it replaces those bonds with IOUs that don’t count toward the debt limit. Once the debt limit standoff is resolved, Treasury puts the bonds back and makes the G Fund whole for any foregone interest.

Combined with similar gimmicks, this strategy of (temporarily) raiding the G Fund makes it possible for the federal government to borrow hundreds of billions dollars more than the debt limit law would seem to suggest. This buys months of additional time before a deal actually needs to be reached.

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The use of “extraordinary measures” goes back to the debt ceiling crisis of 1985, when Treasury Secretary James Baker avoided breaching the debt limit by dipping into the Social Security Trust Fund. This worked but it was probably not, technically, legal.

''Some of the Secretary's actions appear in retrospect to have been in violation of the requirements of the Social Security Act.'' said Charles Bowsher, then the head of the General Accounting Office, following the resolution of the debt ceiling crisis in December 1985. He added, ''We cannot say that the Secretary acted unreasonably given the extraordinary situation.''

After the 1985 crisis, there was a compromise of sorts: Congress codified the treasury secretary’s authority to disinvest certain trust funds (like the G Fund) during a debt limit crisis, but not the Social Security Trust Fund, and with the proviso that the Treasury must make the raided funds whole once the crisis is over. Still, this was a matter of some controversy the next time a treasury secretary felt the need to do it, ten years later, since it certainly violates the spirit of the debt ceiling law. Here’s a New York Times story from December 1995:

As the Clinton Administration prepares another wave of fiscal maneuvers to avoid national default during the budget impasse, the chairman of the House Ways and Means Committee warned today that the Administration was courting a "Constitutional and legal crisis" by usurping Congress's right to control the national debt…
In a statement today, the Treasury Department said that it was [Treasury Secretary Robert] Rubin's "duty and intention to take all legal steps necessary to assure that the nation's financial obligations — obligations already approved by Congress — are honored."
Mr. Rubin has argued that he has been driven to take "extraordinary measures" because of Congress's refusal to approve an increase in the debt limit. Even the Republican budget, if adopted whole, would require a huge increase in that cap on Federal borrowing…
When Congress refused to extend the borrowing limit, Mr. Rubin first said that default was "unthinkable" and insisted that even the threat of failure to pay America's debts could raise interest rates on Federal borrowing. Several major credit-rating agencies agreed, putting the United States on a version of "credit watch," warning investors that the country's political willingness to pay its lenders, as opposed to its ability to pay, could be in jeopardy.
In fact, interest rates have dropped, in part because Mr. Rubin has poured so much effort, and in some cases considerable imagination, into techniques to keep the country afloat.

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I bring up this history to note that this practice that was once considered aberrant has been normalized. Nobody even really complains anymore that “extraordinary measures” aren’t fair play — they’re just part of the fiscal wallpaper now, having been used in debt limit crises in 2002, 2003, 2011, 2013, 2014, 2015, 2017-18, 2019, and 2021.1 There is negative financial market reaction when the debt ceiling crisis appears to lead to real risk of missed bond payments, as in 2013, but not to the use of extraordinary measures themselves. Indeed, it would be good if Treasury had a more robust toolkit of accounting gimmicks, because that would mean the extraordinary measures would be more useful for staving off the risk of debt default, and calming financial markets.

And I think this is the right frame for thinking about another idea for staving off the debt limit crisis, which Matt Levine wrote about on Friday: The idea of selling Treasury bonds above face value, so that, for example, the government could raise $200 in cash by selling just $100 in bonds. If implemented, this could be thought of as just another component of Treasury’s “extraordinary measures” toolkit — another routine accounting gimmick, not a shocking breach from existing fiscal norms.

Dall-E image generation for “Janet Yellen implements extraordinary measures, digital art”

Your first question might be how you would get people to pay $200 for $100 bonds. The answer is that you would raise the interest rate. As Matt describes (and with my apologies in advance for making you think about bond math):

Today the 10-year Treasury note yield is about 3.6%. Instead of paying $100 for a 10-year Treasury note that pays a normal annual interest rate ($3.60 per year) and pays back $100 at maturity, you could pay $200 for a 10-year Treasury note that pays normal annual interest plus $10 per year, and pays back $100 at maturity. You get your $200 back — $10 per year for 10 years plus $100 at the end — plus interest on your money. But that $10 per year of principal return is called interest, and treated as interest for the debt ceiling. (The way the math actually works is that this bond would have about a 15.6% interest rate, that is, you’d get back about $15.60 per year plus $100 at the end.) It’s a “$100 bond” for purposes of calculating how much debt is outstanding, but it’s worth $200. So, again, Treasury can raise $200 by selling $100 of debt.
So every time $100 of debt comes due, Treasury can pay it back by selling $100 of debt for $200, keep the extra $100 to pay its expenses, and render the debt ceiling irrelevant.

One key thing to note here is that the debt limit only limits the principal amount of outstanding federal government debt. Future obligations to pay interest do not count toward the debt limit. By selling high-yield bonds at a premium, the Treasury can effectively convert some of its future obligations to pay principal (which are capped) into obligations to pay interest (which are not capped), and thereby stay within the statutory debt limit.

Another key thing to note is that this strategy should not, theoretically, increase the government’s cost to borrow. While the nominal interest rate on the bond Matt describes is 15.6%, that does not mean the borrowings are truly costing the government 15.6%. The true borrowing cost is much lower because the interest is paid on the face value of the bond ($100), not on the $200 in proceeds actually received, and because the government saves money by paying back only $100 in principal when the bond matures. The “yield-to-maturity” of this bond — the actual rate of return earned by an investor who pays $200 upfront for this bond — is the same 3.6% as if the Treasury had issued a normal bond at par.

Or at least, that’s probably how it would work.

While it would be novel for the Treasury to issue new bonds at a premium, it is already completely typical for bonds (including government bonds) to trade at a premium in the secondary market. If the prevailing 10-year Treasury yield is 4%, and then it falls to 3%, previously issued bonds that pay 4% will become worth more than their face value because of the attractive interest rate. Investors already show a willingness to pay above face value for bonds that pay premium interest rates, so why not in a similar situation where the bonds are newly issued with a premium interest rate?

Of course, it would be good to know what the likely market reaction would be before we rely on this strategy to get around a debt limit crisis. And that’s a reason it would be good for Treasury to test-drive the strategy. In the coming months, as they pursue other “extraordinary measures,” they could try out issuing some bonds at a premium. By doing so, Treasury would start creating some additional headroom under the debt limit — pushing out the “X date” — and provide a proof of concept in case the strategy needs to be used on a larger scale when the more traditional “extraordinary measures” run out of room.

Or, if the market reaction was bad, then we’d learn it’s not a viable strategy, further focusing our elected officials on the need to achieve a prompt legislative solution.

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Is this legal?

I think it’s legal. As Matt notes, the statute permits Treasury to issue bonds “at any interest rate” and set the price and interest rate for those bonds. There are Treasury regulations that say bonds should not be issued at a premium, but those regulations also allow Treasury to waive the regulations at its discretion, saying “We reserve the right to modify the terms and conditions of new securities and to depart from the customary pattern of securities offerings at any time.”

While this is a creative policy approach, it strikes me as significantly less creative than saying — to pick two completely random examples — that Title 42 and the COVID emergency can be used to conduct asylum policy at the southern border, or that the Heroes Act of 2003 can be used to broadly forgive student loan debt. And as James Baker showed us in 1985, it’s worth taking an aggressive approach to questions like “is this legal?” when the alternative is defaulting on the debt.

Is it necessary?

I’m not sure yet. Ideally, we’d have the usual congressional agreement on a debt limit increase before the regular set of extraordinary measures runs out. But pursuing this strategy can be a complement, rather than a substitute, to seeking that increase through Congress.

The more familiar gambit you’ll see floated for getting around the debt limit has to do with the “trillion-dollar platinum coin” — using a drafting error in a law permitting the Treasury to produce commemorative platinum coinage to strike one extremely large coin and deposit it with the Federal Reserve to fund government operations in lieu of issuing bonds. This approach has significant drawbacks. One is that it requires cooperation from the Fed, which is likely to be very reluctant to participate so controversially in a political dispute over the debt limit. Another is that it could be inflationary, if financial markets are not adequately convinced that the coin proceeds will eventually be replaced with bond issuance proceeds once a debt limit deal is finally reached. But a third problem is that it’s a huge middle finger to Congress, or at least to Republicans in Congress, since it’s a bold declaration of Treasury’s ability to get around their legal dictates by literally printing money.

An advantage of the premium bonds strategy is that it can be painted as incremental and technical rather than bold and groundbreaking. Treasury does not need to commit to issuing premium bonds indefinitely, or to claiming that they constitute a permanent solution to the debt ceiling impasse. They do not need to say the debt limit is unconstitutional or ineffective. The messaging can be more like: This is just another extraordinary measure. It is allowing us to further delay the X-date and prevent a default on our debt. We are not sure how long this will remain a practical approach, but we will continue to advise Congress about when we believe the debt limit will be reached. We continue to urge the parties to reach a deal.

The inscrutability of bond math is also politically advantageous. It is easy to attack the coin as reckless and profligate. But regarding premium bonds, what will Republicans even say? How do you even explain in a soundbite what Janet Yellen is doing here that you are so mad about? The more the topic makes people’s eyes glaze over, the politically safer it is as a stalling strategy — ideally, you want to match the dullness and low profile of the existing set of extraordinary measures.

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That’s partly because, even if Treasury finds a way to neutralize the risk of a debt limit breach, it will eventually be necessary for Republicans and Democrats in Congress to reach an agreement on funding the government past September 30. That could mean a series of individual appropriations bills, an omnibus bill, one more continuing resolution, or some combination of those approaches. We might also fail to achieve such an agreement and have one or more partial government shutdowns. This would be undesirable and economically damaging but, unlike a failure to pay government debts when due, it does not pose risk of a severe economic crisis.

Ultimately, that impasse can only be resolved by bipartisan agreement; we cannot “one weird trick” our way out of the need to pass spending bills. What premium bonds can do is remove the risk that we breach the debt limit before reaching such an agreement — and they can do so in a sufficiently dull and technical way that they might not even steal all the political attention from the substantive fight over how the government should spend our money.

Very seriously,

Josh

P.S. I’ll be answering your questions in the Mayonnaise Clinic tomorrow. Please send your questions about this topic (or anything else on your mind) to mayo@joshbarro.com.

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Note the wide array of combinations of partisan control of Congress and the presidency represented here, including times of unified control under both parties.

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