The X-Date, the day when the federal government runs out of money, is fast approaching. Strangely, consol bonds and stablecoins could help America survive the X-Date and a default.
The X-Date is the day upon which the federal government cannot finance its operations. X-Date could be the beginning of an economic meltdown because the federal government will have no money. There will be no money because Congress has not raised the debt ceiling, the amount of debt the federal government can issue.
Why You need to Fear the X-Date
US Treasury Secretary Janet Yellen thinks we could hit the X-Date on 1 June 2023 if Congress does not raise the debt ceiling. Goldman Sachs (GS) chief political economist Alec Phillips thinks the X-Date will fall on 8 June or 9 June.
To explain, tax revenues cannot cover all of Uncle Sam’s expenses. Hence, the US Treasury issues debt (Treasury bonds) to cover the difference. However, federal law limits the amount of debt the treasury can issue without Congressional approval to $2.5 trillion. The nation hit that limit on 19 January 2023.
Republican leaders are refusing to raise the debt ceiling if Democrats do not accept all their demands. Meeting those demands is politically impossible for Democrats such as President Joe Biden (D-Delaware).
A Global Economic Catastrophe
A global economic catastrophe could begin if America reaches the X-Date without raising the debt ceiling. For example, 1.5 million jobs could disappear in a week if the federal government cannot pay its bills, Moody’s Analytics Chief Economist Mark Zandi warns.
Moody’s predicts economic collapse in states such as Alaska, Hawaii, and New Mexico where the federal government and the military are major employers. Areas with industry that relies on defense contracts such as Northern Virginia, Connecticut, Kansas, and Washington State will be hardest hit.
Frighteningly, the debt default could kill 7.8 million US jobs and trigger a $10 trillion stock market crash, Zandi warns.
“No corner of the global economy will be spared,” Zandi says of a US debt default. For example, the default will hurt Chinese factories by destroying orders. In particular, a default will hurt companies that use US dollars (the world’s reserve currency) for international trade. Only a few companies can switch to alternatives, such as the Chinese yuan. This will destroy business for Chinese factories, Chilean mines, Saudi oilfields, and Sri Lankan tea plantations.
Businesses in countries such as Zimbabwe, Venezuela, and Sri Lanka where the local currency is worthless will feel the most pain. Those businesses need dollars to pay suppliers in other nations. If the dollar collapses, those companies could be reduced to barter or borrowing yuan from Chinese banks.
Investors who own US Treasury bonds, such as the Japanese government, will be hard hit. The Japanese government held $1.104 trillion in US Treasury bonds in January 2023, the US Treasury Department estimates. The Chinese government held $859.4 billion worth of Treasuries and His Majesty’s Government in the UK held $668.3 billion in Treasuries. All those bonds could become worthless paper after a debt default.
A debt default could shatter the $24 trillion market for treasury debt, causing financial markets to freeze up. This could lead to stock market crashes and destroy everything from the Tether (USDT) stablecoin to the Bank of England.
How To Prevent a Debt Default
Theoretically, there are three ways the federal government could issue debt and get around the debt ceiling.
First, the Treasury could mint a $1 trillion platinum coin or coins. I will not go into this option here because I have explored this idea elsewhere.
Second, Biden could invoke Section Four of the 14th Amendment to the US Constitution. Section Four says: “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”
Some legal scholars claim Section Four makes the debt ceiling unconstitutional. However, the US Supreme Court has never ruled on it. You can argue Section Four only allows the federal government to issue debt to finance pensions for Union Army veterans and their families.
Remember, they enacted the 14th amendment just after the Civil War. Back then, some people feared Confederate sympathizers could get control of Congress and punish Union veterans by canceling their pensions.
Can Perpetual Bonds Save Us?
Third, the US Treasury could issue consol bonds. To explain, a normal bond contract requires the borrower to repay the lender in full at some point. For example, the US Treasury has to repay a 10-year treasury bond after 10 years.
Conversely, a consol or perpetual bond has no maturity date. Instead, the bond pays interest to the lender in perpetuity. Interestingly, lawyers consider a consol bond an equity similar to a stock rather than a security like a bond.
Intelligencer writer Eric Levitz thinks the debt ceiling does not cover the consol bonds because such bonds eliminate the principal of the debt Uncle Sam is obligated to repay. Hence, Levitz thinks the Treasury could issue unlimited amounts of consols.
Consol bonds could be popular because of higher interest rates. Another advantage of consol bonds is that the Treasury could sell them through the stock and cryptocurrency markets. Hence, you could buy consol bonds on Robinhood or through Binance’s cryptocurrency exchange. Thus, they could sell consol bonds to ordinary investors and institutional investors at the same time.
Importantly, commercial banks, the Federal Reserve, central banks, hedge funds, sovereign wealth funds, and other entities could lend the federal government enormous amounts of money by purchasing consol bonds.
Unfortunately, nobody knows if it is Constitutional for the Treasury to issue perpetual bonds. Notably, the US Supreme Court could rule that Treasury consol bonds are illegal. However, the Supremes could face enormous pressure from Wall Street to make consul bonds constitutional.
Notably, Chief Justice John Roberts and his associates will have to face their billionaire friends on the golf course after default. Moreover, I cannot imagine any billionaire inviting Associate Clarence Thomas to his superyacht or hunting lodge if he rules a debt ceiling fix unconstitutional. My prediction is the Supremes will cave on the debt ceiling after talking to their brokers.
Can Synthetic Assets save us from the Debt Ceiling?
I think stablecoins and other synthetic assets could save us from the debt ceiling.
A stablecoin is a cryptocurrency containing a smart contract. This smart contract is a digital mechanism linked to a real-world asset, such as a bond or a fiat currency. For example, the buyer of a bond stablecoin could own a bond and receive interest payments made by the smart contract. Similarly, US dollar stablecoins such as USD Coin (USDC) make payment in US dollars.
The US Treasury Department has the statutory authority to mint coins. Hence, the treasury could mint coins, sell the coins and use the proceeds to repurchase government debt from the Federal Reserve or finance federal operations.
One interesting idea is to issue a consol bond as a synthetic asset they can sell as a cryptocurrency or a stablecoin. Notably, they back Tether (USDT) the cryptocurrency with the highest 24-Hour market volume ($25.180 billion on 24 May 2023 compared to Bitcoin’s $16.213 billion) with US treasuries.
Tether holdings held 76.53% of its reserves in US Treasury bills worth $53.045 billion on 31 March 2023, BDO reports. I think Tether’s popularity shows there is an enormous market for a US Treasury stablecoin.
My prediction could raise hundreds of billions of dollars by selling a consol bond stablecoin or synthetic investment. For example, Treasury Coin or US Treasury Coin. USTC. My prediction is that USTC could become the most traded cryptocurrency in existence overnight, creating a gigantic new market.
Could Synthetic Assets turn the Debt Default into an Economic Boom?
The Treasury could keep crypto fans happy by building a USTC Coin that pays Bitcoin (BTC) or Ethereum (ETH) dividends. The treasury could issue several stablecoins, a consol bond coin, a Bitcoin product that pays in Bitcoin, a Bitcoin stablecoin pegged to stablecoin, a Platinum stablecoin pegged to a platinum coin, a gold stablecoin, a silver stablecoin, an Ethereum stablecoin, and a US Dollar Stablecoin pegged to the USD.
Selling all of those coins could raise hundreds of billions of dollars. One advantage to stablecoins is that the Treasury could create them almost instantly using technologies such as Ethereum (ETH). Ethereum is a build-your-own cryptocurrency kit almost any software engineer can use. The Treasury could build stablecoin for the Binance and Ethereum blockchains.
Speculators and Wall Street will support this effort because it will create an enormous new market to cash in on. Moreover, decentralized (DeFi) entrepreneurs can create hundreds, or thousands, of new products based on the Treasury coins. I think synthetic assets, or consol bonds, could turn the debt default debacle into an economic boom fueled by consol debt.
However, that boom will only occur if our leaders have the imagination to issue consol bonds and other synthetic assets. If our leaders lack that imagination, America could face a bleak economic future.