Debt-Ceiling Daze: Boehner Tacks Right, Setting Up Final Clash With Democrats

Heading into the weekend, the U.S. economy wheezed, Tea Partiers slapped John Boehner silly and financial markets braced for impact. As one keen observer of the human condition once said, what a world, what a world!

When reason has flown, anything is possible. The House Speaker, having staked his political future on passing his deficit-reduction bill, buckled to pressure from right-wing Republicans and reshaped the legislation along even more conservative lines. Along with cutting spending by $917 billion, it would now also require Congress to pass a constitutional balanced-budget amendment before raising the debt ceiling again. Although nothing is certain in this topsy-turvy session on Capitol Hill, House lawmakers were expected to pass the measure late Friday.

That might well help Boehner save his job. But it will do less than nothing in brokering a deal with Senate Democrats, who are proceeding with their $2.2 trillion spending cut package. If there was little room for compromise before Boehner tacked right, there is even less so now.

Hey, here's an idea!
Is there any way out of this mess? Perhaps the most ingenious solution to the debt-ceiling impasse comes from a Yale law school prof. All you need is a couple of $1 trillion coins:

Sovereign governments such as the United States can print new money. However, there's a statutory limit to the amount of paper currency that can be in circulation at any one time.

Ironically, there's no similar limit on the amount of coinage. A little-known statute gives the secretary of the Treasury the authority to issue platinum coins in any denomination. So some commentators have suggested that the Treasury create two $1 trillion coins, deposit them in its account in the Federal Reserve and write checks on the proceeds."

The adjoining chart illustrates what's at stake here (click to enlarge). After the feds exhaust their borrowing authority at midnight on August 2, a two-month delay in raising the cap could cause the largest quarterly economic decline in more than 60 years, estimates Washington think-tank the Center for American Progress. Such a drop would be more dire than the worst quarter in the latest recession, when nearly 2 million jobs vanished in a puff of toxic mortgages.

After midnight
And what happens on Tuesday if lawmakers fail to lift the debt ceiling? Well, the Treasury may be able to buy a few more days by shuffling payments around. But in essence it starts making choices about which checks to cut and which to hold. Priority No. 1 -- ensuring that the financial system doesn't seize up, meaning bondholders still get paid. This calculation is zero-sum, notes Slate's Annie Lowery:

The Treasury Department will not admit outright that bondholders will get prioritized over, say, Social Security recipients. But they will.

That means it will be soldiers, doctors, federal employees, and government contractors who will see their payments delayed. There is no real term of art for this scenario, at least not yet. But the wonks have taken to calling it "selective default," "payments prioritization," or "delinquency."

Even as lawmakers dig in on Capitol Hill, of course, a deal remains within reach. Although financial markets are nervous, they still seem to be betting on a stay of execution. Compromise in Washington will demand political courage. Even more important, it will require a healthy respect for the price of failure.

Related:

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• Would a U.S. Credit Downgrade Smash the U.S. Economy -- or Just Dent it
• How Long Will Wall Street Stay Calm Over the Debt Ceiling
• Debt Ceiling Agonistes: Do Something, You Schmucks
• Mitch McConnell Has Seen the Enemy, and It Isn't Democrats