Options- they're a credit instrument which promises the right to buy or sell an item at a set price, which normally expires after a certain time frame. The proposal for the option option is for the US Treasury to issue the Fed a 90-day option which can be used to service the deficit. At the end of the 90-days, either the Treasury repurchases the option at a lower value or the Fed allows it to expire. The particular advantage with this is we only need a fraction of the debt held to repay debt as it falls over several different maturity dates, so that we can borrow the the $120B + interest that falls due on the 17th and then repurchase it, allowing us to service the bonds over the next several weeks until the debt ceiling issue is resolved, losing only the interest owed from the amount granted. Since it's not a debt and there's no principal or interest to repay, it does not add to the debt; however, I'm not certain how we'd keep the Fed from executing the option.
Premium Bonds- Covered by Lexington in the US subforum, a premium bond operates like a normal bond, wherein you promise to repay the debt and pay interest overtime. However, the fundamental difference is that you borrow more than the the face value of the bond- Rather than issuing a face-value bond for the amount borrowed and paying interest over ten years and the balance afterwards, you agree to pay higher interest rates and sell the bond above it's principal value. So, rather than pay 2% on a $100 bond over ten years and repay the $100 afterwards, you sell a $100 bond for $275 and repay the higher value until it's worth $100 at the end of ten years. Since only the face value of the bond counts towards the debt, not the interest, selling premium bonds allows us to repay our bondholders and finance the deficit without increasing the debt. While the use of premium bonds is suggested for financing new debt while keeping the face-value of the debt held steady, you could, in practice, sell a bond w/ a face value of $0 and repay it over 30 years, which I don't consider such an aweful proposal. Since existing bonds are re-payed as they fall due, the debt level falls while you maintain financing. This is similar, yet fundamentally different, from option 3-
Consols- Similar to a Premium Bond w/ a zero-value face, the major difference is consols don't expire. Again, since there's no repayment of principal, they don't count towards debt. The downside is they're never re-payed; however, the value of their coupon will decline over time for the simple reason that a dollar today isn't worth a dollar fifty years ago, and a dollar fifty years from now won't be worth a dollar today. While there's a distinct disadvantage, it again has the advantage of having no face value and therefore not adding to the debt, and would have a smaller coupon (interest payment) than a premium bond. Where this could be particularly useful would be in intragovernmental debt holdings; since the government is repaying itself, it holding it's own consols can ensure continued funding to government trusts (say, social security or Medicare) without having to role over bonds. It also eliminates the charade of $6 trillion in debt the American government borrowed from itself and intends to role over. I'm fond of the idea of an instrument-swap on intergovernmental debt, exchanging the bonds held for the same amount in consols; further, as the SS surplus continues, it can continue to create coupons to fund itself w/.
I had intended to go further into detail, but I'm not much of a writer. Personally, I'm of the accord that the instrument-swap on intragovernmental debt can help us retain solvency and eliminate this debt-crisis charade hanging over us, at least until we need to borrow more. If we do that current to issuing 30-year premium bonds w/ a $0 face, we could effectively reduce the debt level and debt arguments. I do think there's room enough for all three options in funding a government, especially when people and politicians are ignorant (willfully and excusably both) of debt-instruments and the operation of a sovereign currency.