A US default cause be failure to raise the debt ceiling would bring on disaster, Paul Krugman said.
That’s because US debt is the linchpin of global financial markets, he said.
Krugman listed three options for the Biden administration to avoid a default if lawmakers don’t raise the ceiling.
A US default would bring on catastrophic consequences for the economy – but there are three things the Biden administration can do if Congress fails to raise the debt ceiling, according to Nobel laureate Paul Krugman.
The top economist pointed to the current debt ceiling crisis in an op-ed for the New York Times on Tuesday, with policymakers still at an impasse over whether to raise the US’s borrowing limit.
If an agreement to raise the ceiling can’t be struck, the US could default on its dues as soon as this June, Goldman Sachs estimated – an event that would have harrowing implications for the US economy.
Congress is still sparring over a deal, with Republicans putting together a package that includes hefty budget cuts, like banning student-loan forgiveness. On Monday, Speaker Kevin McCarthy said the House would vote on a bill to lift the debt ceiling until 2024, though he didn’t specify what would be included.
“Failing to raise the debt limit would have disastrous consequences,” Krugman warned, as US government debt is the linchpin of global financial markets. “At minimum, it would disrupt the functioning of the federal government. At worst, it would precipitate a global financial crisis, possibly as bad or worse than the crisis of 2008,” he added.
But there are three possible Plan Bs for the Biden administration if Congress can’t reach a deal to lift the debt ceiling, Krugman said:
Mint a $3 trillion platinum coin: The Treasury Department has the authority to mint commemorative coins. A $3 trillion platinum coin could be deposited at the Federal Reserve to pay off national debts. The Fed would then sell some of its bond portfolio, which in effect means the US is borrowing money through an alternative method.
Issue premium bonds: Such bonds would off an unusually large annual interest payment. The US Treasury could auction them for well above their face value. Krugman said this is a way to borrow money without technically adding to the national debt burden.
“All of these plans have drawbacks, and considered in isolation they each sound a bit silly. But they should be graded on a curve – compared not with normal fiscal management, but with the catastrophic consequences if the US government simply stops paying its bills,” he said. “When the party that controls one body of Congress has no interest in keeping America governable, catastrophe is always a real possibility.”
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Source: https://finance.yahoo.com/news/paul-krugman-warns-us-debt-225100787.html