A classic, the debt crisis? A saga even...

As in an ancient tragedy, we have a unity of place, Washington; a unity of time, the time it will take as is customary in budgetary matters; and a unity of action, will we prevent a global debt crisis?

And as in an ancient tragedy--a drama with no way out--we know the end even before the beginning. Prometheus will be tortured eternally, Antigone will always rebel against the unjust order of men, Cassandra will not be understood, Paris will always be Paris... And an agreement will be found ‘in extremis’ between the presidential administration and its opposition in Congress. Until the next time.

A saga? It goes on and on... since 1960, the debt ceiling has been raised 78 times. Almost every time it was necessary, with the notable exceptions of 1968 and 1971 when the country defaulted on its debt. This had only happened twice before, in 1862 and 1933. And in 2011, we felt the wind of the ball, the political impasse leading Standard & Poor’s to lower the credit rating of the United States from AAA to AA+, where it still is. A first at the time. One can imagine the trauma in Luxembourg...

What could derail the synopsis? Where is the suspense? Who is the plot twist? Donald Trump! Trump has the power of nuisance in the American Congress that should not be underestimated: the small twenty or so Maga elected representatives who blocked American political life for nearly 15 days by preventing the election of the speaker of the House of Representatives, even though he comes from their ranks. The aim is to undermine the authority of Washington and the president of the United States. And so much the worse if, in the process, they dynamite the American economy and the world economy...

Intermission

Here comes the intermission with a bit of context.

In the United States, the maximum borrowing capacity of the government is strictly controlled by the legislator. The current ceiling is $31.381trn dollars. It was ‘only’ $28trn in June 2021--the date of the last episode--and should be reached by spring according to the latest estimates. Beyond that, the state will not be able to borrow to finance its structurally deficit budget, pay its civil servants, its pensioners and its soldiers.

This makes a new political agreement necessary. Complicated...

‘In Ponzi we trust’

Let’s go back to the play.

What solutions does Joe Biden have left? A magic trick. “Hocus Potus and let the money printing press be replaced by a coin”... of money.

And it is possible. American law regulates the issue of banknotes and coins. But only in gold, silver or copper for the latter. For some obscure reason, platinum is exempt from this restriction. In theory, coins of any value could be produced. Arbitrarily, a $1trn coin has been mooted since 2011. Of course, it would have to weigh almost 28,500 tonnes. This should not be an obstacle, as Hollywood is not that far from Washington...

Once the coin has been minted, it will be sent to the Federal Reserve for registration, thus crediting Uncle Sam’s account with $1trn. And allowing the repayment of an equivalent part of the American debt.

And then it’s back to the drawing board. “In Ponzi we trust” could be engraved on the coin.

Perpetual motion

This absurd scenario has the merit of raising the question of the level of indebtedness of the economy and its consequences. It is a subject that seems to be taking a back seat in the news, but which could be the trigger for the next global financial crisis. A stagflationary debt crisis according to Nouriel Roubini, the man who predicted the subprime crisis with little fanfare.

It is time to put the problem of deleveraging economies on the agenda. At a time when financing needs are exploding to make the transition to a sustainable economy it will be difficult. But it is necessary.

“One does not die from making debts”, said Sacha Guitry, a connoisseur. “One dies from not being able to make any more.” Yes... but perpetual motion does not exist according to physicists. This play has yet to be written.

Read the original French version of this editorial column on the site