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Friday, January 27, 2023

How to Pay Off All Treasury Bills Without Raising the Borrowing Limit

The news is full of dire warnings of what will happen if Congress does not raise the debt ceiling and the US Treasury defaults on its debt.

Conservative House Republicans in the new Congress have vowed to block any increase in the debt ceiling without an agreement to cut huge government deficit spending. President Biden has vowed no deal and says Congress needs to pass a clean bill that only raises the debt ceiling.

Unless Congress raises the debt limit, Treasury Secretary Janet Yellen estimates the Treasury will run out of cash and be unable to pay all of its bills sometime in June, triggering a debt default. outstanding US Treasury debt

It would be ridiculous, wouldn’t it, for the Treasury to default on its debt when it owns more than half a trillion dollars of the most classic monetary asset that exists: gold. If there is a way to convert the gold into cash in the Treasury bank account, then the government can pay its bills through the end of fiscal year 2023 without an increase in the debt limit. There is a way, and it has been done several times in the past. All that is required is the passage of a bill that changes a few words in the existing legislation, a bill that both Republicans and Democrats should support.

The Treasury owns a lot of gold: 261.5 million ounces, or more than 8,170 tons. The market price of gold is about $1,940 an ounce, so Treasury gold is actually worth about $507 billion. Due to a law passed in 1973, the Gold Reserve Act requires the Treasury to value its gold at $42.22 per ounce, a number 50 years old and with no connection to reality. Gold is, in fact, a gigantic undervalued Treasury monetary asset. Unlike the misconception of the Treasury issuing a trillion dollar platinum coin, the gold held by the US Treasury is real; Due to an outdated law, the Treasury has just valued it at an absurdly low price.

With the proposed change, the Treasury can simply issue gold certificates against the market value of your gold and deposit these certificates into your account with the Federal Reserve. The Federal Reserve will credit the Treasury account with an equivalent dollar value, and the Treasury can spend the money as needed. The Treasury already has $11 billion in gold certificates on deposit with the Federal Reserve. If the Treasury revalues ​​its gold holding at current prices, we estimate it can deposit $494 billion in new gold certificates with the Fed, creating $494 billion in spendable dollars without creating a penny of additional Treasury debt.

The Gold Reserve Law, modified in 1973, provides that: “The Secretary [of the Treasury] can issue gold certificates against other gold held by the Treasury. The Secretary may prescribe the form and denominations of the certificates.” So the authorization to create gold certificates couldn’t be clearer.

Then come the words that need a legislative change: “The number of certificates in circulation cannot be greater than the value (for the purpose of issuing those certificates, $42.29 per fine troy ounce) of the gold held against the certificates. of gold. .” New legislation is required to amend the Gold Reserve Act and remove “$42 and two-ninths” and replace it with “current market value (as determined by the Secretary at time of issue).”

voila! The Treasury has $494 billion more in cash with no additional debt. The president’s budget proposed a $1.2 trillion deficit for fiscal year 2023, so the additional funds should take Treasury from the current June deadline to beyond the end of fiscal year 2023, giving the new Republican majority of the House and the Democratic majority in the Senate have time to negotiate, in regular order, and approve a budget for fiscal year 2024 with spending cuts, as well as approve a new debt ceiling of adequate size to facilitate the financing of the government in the year fiscal 2024 and beyond.

By simply acknowledging the true market value of Treasury gold holdings, the intense embarrassment to the administration and Congress of an impending Treasury default can be avoided entirely. Indeed, it is ironic that in a world of inflated fiat currency and massive deficit financing, simply recognizing the true value of government gold holdings can maintain government solvency. There are no budget tricks involved. It’s been done before and it can work again.

Alex J. Pollock is a senior fellow at the Mises Institute and co-author of the new book, “Surprised Again!—The Covid Crisis and the New Market Bubble. ” Paul H. Kupiec is a senior fellow at the American Enterprise Institute.

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