"Alex, I'll Take 'Debt Gimmick' for $1 Trillion

With Congressional Democrats Farther Away Than Ever from Approving Two Big Spending Bills - Thanks Joe Manchin - A Bad Idea Resurfaces to Deal With The Biggest Crisis.

I’m waiting for a sane Democrat (oxymoron alert) to say that it’s “darkest before dawn.” It would at least add a little levity to the negotiations that resemble more a locker room brawl that is spilling out onto the field for everyone to see. Nancy Pelosi broke her promise to vote Thursday on a bipartisan $1.2 trillion infrastructure bill that has already passed the Senate. The votes weren’t there to pass it.

“Darkest before dawn” is the oft-heard cliché, book, and musical title when legislative negotiations reach a nadir before someone comes up with a brilliant compromise or caves with “face-saving” fig leaves. Eyeballing the Chernobyl-style meltdown among congressional Democrats, neither seems likely, at least today.

By raising the stakes with his public statement about shoring up Social Security and Medicare yesterday, along with raising the pro-life Hyde Amendment as a requirement for a much-less-expensive budget reconciliation bill, Manchin may have killed the whole shebang. He said as much.

US Senator Joe Manchin, D-WV, with a constituent. Manchin is the lone remaining Democratic elected statewide official in highly Republican West Virginia

Just to recap, there are three things at play, and only one of them has an honest deadline with real consequences. Not the “Bipartisan Infrastructure” bill (BIB), priced at $1.2 trillion. About half the BIB is funded by “repurposed” unspent tax dollars from prior COVID-related relief bills. Not the Democratic “Build Back Better” budget reconciliation bill, priced at a cool $3.5 trillion, greater than all we spent to fight and win World War II.

The issue with a real deadline is the national debt limit, which is set by law. Until July, six months into the Biden Administration, it had been “suspended” by previous COVID recovery-related spending bills approved during the Trump Administration. It enjoyed bipartisan support then. Crunch time arrives sometime between October 18th, according to Treasury Secretary Janet Yellin, or possibly by early November, according to the bipartisan Congressional Research Service (part of the Library of Congress). “Extraordinary measures” are already underway, it seems, to keep paying bills without exceeding the debt limit.

You know the deal. Democrats sought no GOP input for their massive $3.5 trillion “progressive” wet dream. But they expect Republicans to help them suspend the debt limit again to pay for it. Republican Leader Mitch McConnell has been offering consistent advice to Democrats since early summer. Do you want to pass your bill, Democrats, through a reconciliation process that helps you evade the filibuster? Fine, you didn’t seek our input when you crafted it, so you do not need our help to suspend the debt limit.

You broke it, you own it.

Polling shows Democrats stand to get blamed if things really meltdown in October.

Democrats called the Republicans bluff with a vote earlier this week. They discovered that no, McConnell and his unified conference were not bluffing.

What exactly are the Democrat’s options now? There are several interesting scenarios that could play out over the next several days - especially with the Senate’s Parliamentarian out for breast cancer treatment (we send our prayers and best wishes for a full recovery to Elizabeth McDonough).

First option: Somebody caves

This is the most likely option. It doesn’t appear that Senate Democrat Joe Manchin will cave. He is actually doubling down. He is now insisting on a smaller price tag in the $1.5 trillion range AND the pro-life Hyde Amendment that prohibits tax dollars to be used to pay for abortions (an amendment Joe Biden consistently supported as a US Senator).

The so-called House “moderates” (in reality, there is no such thing as a “moderate Democrat” in Congress), led in part by New Jersey Democratic Rep. Josh Gottheimer, could cave as part of a deal to save what they really support, which is the $1.2 trillion Bipartisan Infrastructure Bill. But they would also need some kind of face-saving action, such as a lower price tag on the partisan $3.5 trillion spending bill. Question is, which favorite Democratic oxen are they willing to gore (green new deal provisions? Paid family leave? Medicare and Medicaid expansion?) to reduce the price tag. I can see progressive primary opponents beginning to line up, and soon.

Add Democratic Senator Kyrsten Sinema in with this group. She’s no moderate but is scared of the massive price tag and its promise of massive inflation that especially harms fixed-income seniors in retirement-heavy Arizona. And she’s also facing pressure from her own party.

Sinema head-faked her Democratic colleagues to relieve some of the pressure by claiming she supports the green new deal climate-change provisions of the massive $3.5 billion boondoggle. But she has the same problem with her Democratic pals as Gottheimer - whose oxen do you propose be gored? Sinema was just re-elected to a full term in 2020, so she doesn’t have to worry about electoral consequences until 2026 during the next President’s first mid-term election - likely, it would seem, a Republican.

The most likely group to cave are the progressives who, while full of passionate intensity, lack the experience, seniority, or brainpower to win. They will eventually succumb to a deal that allows them to claim victory while apologizing weepingly for failing to do more. They are holding the bipartisan infrastructure bill hostage, which suits debt-conscious conservatives just fine. They are likely to be persuaded (pressured) to take the best deal Schumer can negotiate with Manchin (probably in the neighborhood of $1.7-$2.5 trillion dollars). Manchin and maybe Sinema will falsely claim that they “saved” taxpayers $1 trillion or more in higher taxes and inflation-inducing spending. The Squad will claim that they got a “down payment” and will promise to be back for more in an election year.

Under this scenario, 81-year-old outgoing Speaker Nancy Pelosi and her massive ego will get their legacy spending bill. Joe Biden can claim victory for his amorphous “Build Back Better” agenda. And the rest of us can hunker down for some serious stagflation in the months if not years ahead.

Second option: Republicans decide to enter negotiations

This is highly unlikely. Republicans feel no political pressure to extract Democrats from the painful horns of their dilemma. While some (not all) support the infrastructure bill, there is little but misery in the $3.5 trillion boondoggle, from higher taxes and wasteful spending to dubious tax bennies (journalist bailouts and other tax cuts for the wealthy), none of which benefit their constituencies.

But it is possible that McConnell and future House Speaker Kevin McCarthy sniff that they can cut a better deal than the squad with most Democrats to get both infrastructure spending and a pared-down budget reconciliation bill with fewer tax increases on favored constituencies. It would include a debt limit suspension that lasts only a few months, not until after the 2022 elections as Democrats want. Kumbaya.

This would take members of the House and Senate GOP caucuses putting pressure on their leaders to do this. I do not see this happening, or such a deal being acceptable to Democratic leaders. This would be an onion and garlic sandwich on moldy bread for McConnell and McCarthy, who would writhe and wretch with every disgusting bite.

Here’s a dirty little secret. There is very little public opposition to tax increases on large corporations or the mega-wealthy, many of whom also provide substantial support to Democrats (think Mark Zuckerberg, Jeff Bezos, Tom Steyer, George Soros, and many, many more). The “country club Republicans” have now become country club Democrats - they are now the party of the wealthy, highly-educated elites who wear “tax the rich” dresses to expensive galas and frolic in outer space. I find zero GOP sympathy to protecting the ill-spent assets of people who have a quest to destroy Republicans and their working-class supporters, whom they deride as “bitter clingers” and “deplorables.” Tax increases that proportionally hit them might prove very attractive, indeed. Republicans could improve tax provisions and help eviscerate the most damaging aspects of the green new deal. The “squad” would be sent packing.

Again, this is highly unlikely and would still depress and confirm the worst suspicions of GOP rank and file voters, who want their leaders to fight. Further, it would enrage the progressive base that Democrats rely on. Not happening, in my opinion.

Third option: Manchin blows up the whole process by switching parties

This is also unlikely, but I give it higher odds than Republican leaders bailing out Democrats. The more public attacks that progressives make on Manchin, treating him as a pariah, the more likely he could bolt the party, become an Independent, and caucus with Republicans. As with the late Jim Jeffords’ (D-VT) celebrated switch from the GOP to the Democrats the last time there was a 50-50 Senate nearly 20 years ago, it would turn over control of the Senate to the other party. Manchin’s seniority would likely be protected, including keeping his chairmanship of the Committee on Energy and Natural Resources. He might otherwise lose that chairmanship if the GOP assumes control of the Senate in the 2022 elections, without him.

Manchin’s departure, while it would likely play well in West Virginia, would excise from the Democratic caucus one of its brakes. He would lose no leverage in the process, and Schumer’s headache would become McConnell’s. But it is a headache McConnell would happily accept. Manchin would also be much more welcome in the Senate GOP conference. He knows that.

Suddenly, the issue of a reconciliation bill and lifting the debt limit would become truly bipartisan with Mitch McConnell returned to his perch as Majority Leader. Bernie Sanders would be replaced as Budget Committee chair by South Carolina’s Lindsey Graham. Let the fun and games begin. A debt ceiling increase might be the only thing in a reconciliation bill they could agree to.

The question is whether the 73-year-old Manchin plans to seek reelection to the US Senate in 2024, or perhaps return for another run as Governor of West Virginia in 2022. If he plans to retire regardless, then this becomes an interesting “legacy” play. He would be less likely to switch under that scenario. Don’t bet much money on this, but it would be delicious.

Fourth option: Treasury Secretary Yellen uses her authority to mint a $1 Trillion Platinum coin and deposit it with the Federal Reserve.

Scroll down to paragraph (k) in the link above. There is a modicum of credibility to the assertion. But make no mistake, this is a pure gimmick and is pooh-poohed by leading economists and even some Democrats, including Barack Obama and Joe Biden (at present), but enough favorite Democratic economists are pushing it to make a real possibility. Don’t take my word for it. You can go on Twitter and search #MintTheCoin.

From Bloomberg:

Every day that goes by, we get one day closer to hitting the statutory debt limit. If Congress doesn't vote to hike it, we could theoretically experience the unthinkable: A default on U.S. Treasuries, which are widely understood to be the world's safest asset. People have all kinds of theories for what would happen if we did hit the ceiling, but the truth is that nobody actually knows. 

Fortunately there's an easy way to defuse this bomb. As I've been writing about this week, there doesn't actually need to be a vote at all. The Secretary of the Treasury can mint a trillion dollar platinum coin, purchase $1 trillion worth of debt from the Fed, retire that debt, and then create breathing room under the debt ceiling. It sounds weird, of course, but it's legal and it would solve the problem of a catastrophic default and potential associated recession.

And since the choice is between "weirdness" on one hand and "catastrophic default leading to a depression" on the other hand, there's a good reason to go with weirdness.

You should read the whole story if you can, which explains why it has to be Platinum, why it wouldn’t contribute to inflation, and an admission that it’s a budgetary gimmick. If the debt limit is eventually going to be lifted anyway, then who cares how it is done, some might say.

Members of “The Squad” are pushing it. They even have a website.

You can see why this is attractive. But even CNN, which I loathe to quote here given its lack of journalistic credibility and detachment from reality, has issues with it. Even a broken clock is right twice a day:

Few serious economists actually advocate for the coin solution. The most notable was New York Times columnist Paul Krugman, who has a Nobel Prize in economics, who said last year that using the coin "would just be an accounting gimmick" that "would just allow Treasury to bypass GOP blackmail" on the debt ceiling.

But as bad as a default would be, most experts oppose the use of the trillion dollar coin. They say that such an audacious way of avoiding default would shake the confidence in the dollar and US Treasury as much or more than an actual default.

"The trillion dollar coin is a badly flawed effort to workaround the debt limit that will make a bad situation even worse," said Mark Zandi, chief economist for Moody's Analytics, who has warned that a default would be "financial Armageddon."

"Global investors will know that this isn't a sustainable way to pay the government's bills, and given the constitutional crisis it would ignite, it will increase the odds they won't get paid in a timely way at some point in the future. The trillion dollar coin will not forestall a financial crisis and economic crisis downturn. The only winner in all this would be cryptocurrency."

Using the coin to pay America's debts would shake the confidence in the dollar going forward, and would only call attention of investors worldwide to problems of governing the country, said Philip Wallach, senior fellow at the American Enterprise Institute, a conservative think tank.

Paul Krugman is the best evidence that winning a Nobel Prize doesn’t mean you’re very smart or predictive. I usually read his investment advice and do the opposite, which has served me well.

Why stop at $1 trillion? Why not mint a few $1 trillion Platinum coins? Then what?

Don’t dismiss it. It has a higher likelihood of being done than option 2 or 3. The question remains whether Democrats are more invested in their respective ideologies or their political fortunes? Politics are always first and foremost on the minds of caucus leaders, Democratic and Republican, in the House and Senate. And right now, you have to envy the positions of Sen. McConnell and future Speaker McCarthy. They are in the catbird's seat and they know it. And fortunately for them, so do their caucuses.

The Democrats may be able to pull a rabbit out of their hat when this is all done. But in many respects, great damage has been done to their political prospects.

Yes, it is darkest before dawn. The question is when dawn arrives, and what will it look like?