There are  creative options that the Treasury might use, and these center around gold.  The Treasury could simply sell gold, which it has the legal authority to do.  At current prices this could bring in about $389 billion of revenue.  However, a sale of gold would also require redemption of gold certificates held by the Federal Reserve.  But there are other, more creative ways that the Treasury might reap the benefits of a gold sale, without actually selling gold itself.  For example, the Federal Reserve presently is carrying the value of the gold certificates it holds on its books at $11.041 billion, reflecting the price of $42.22 per ounce set under the Par Value Modification Act.  Should Congress authorize a change in the par value of gold to its current market price of about $1487.00 per oz., the Fed’s gold certificates would be revalued at about $389 billion.  Section 7 of the Gold Reserve Act of 1934 provides that in the event of a revaluation of the Federal Reserve’s gold certificates, the capital gain accrue to the Treasury and not to the Federal Reserve.  Hence, the Treasury’s account at the Fed, and recorded government revenues, would increase by $389 billion.  This would bring the Treasury’s deposits at the Fed to nearly half a trillion dollars or more.  These are funds that the Treasury could then use to settle debts.  Note that the revaluation would not increase the federal debt, nor would it require the actual sale of gold.   It would however require an act of Congress.  However, given the desire to buy time, it is hard to see Congress offering much resistance to passage of an accounting gimmick that has only revenue and no debt implications.

Now, some of these options may already be embedded in the Treasury’s calculation that Aug 2 is a hard deadline.  But the kinds of monthly deficits that would follow seem relatively small when compared to the potential resources that could be tapped if there was a desire to do so.  So, saying that August 2 is a hard cap may simply be a way of trying to force decisions, when there may be several more months more of flexibility to draw upon if a solution seems near.

As one wades through the deficit issues and searches for available funds, the stark reality is that the main problem is spending.  Moreover, the problems are increasingly associated with entitlement programs that were not adequately funded and only promise to grow even larger.  It is interesting, for example, that the budget of Health and Human Services now exceeds that of the Defense Department.  Increasing taxes and raising the debt limit may seem like simple solutions. But in reality these options are “kick-the-can-down-the-road” maneuvers that look distressingly like the Europeans’ approach to their fiscal problems.

Continue reading →