Yves here. I must confess that I can’t take as much interest as I ought to in the debt ceiling drama. This is a game of chicken. The Administration, despite all its posturing, is not going to default on Treasuries and kill the chance for a Biden reelection stone cold dead. And while Biden is chest-thumping, Yellen is acting like a frightened puppy. She can’t even credibly posture that the Administration has a few Houdini slipping out of his chains moves at hand. Why isn’t she at least talking up the $1 trillion coin to have the fun of watching some Republican heads explode?
Having said that, it seems pretty odd that (given my confession that I don’t like wasting mental energy on this topic) that I have seen a lot of discussion of the 14th Amendment and (at least in the past) of the platinum coin, yet comparatively little on consols, otherwise known as “Peter Pan” bonds because they never mature. They are just a steam of annual payments. Because there is no principal repayment, they allegedly don’t count as debt for debt ceiling computation purposes.
And yes, there is demand for this sort of thing. Even when I was a kid, Treasury traders would sometimes create “strips” by creating synthetic instruments composed of Treasury coupon payments only, and then separately trade the left-over principal payment. They’d also reassemble these instruments. I assume the reassemblage was an arb and have no idea if this activity occurs on the scale it once did.
Mind you, it’s not as if no one has ever brought up this device. Google shows articles in Forbes and John Cochrane in past debt ceiling dustups, and this year, one by Matt Yglesias early this year and even a New York Times piece by Paul Krugman in April. But I don’t sense Krugman has the clout he once wielded, and I don’t see anything resembling a serious policy paper treatment. So this idea looks to be on the far edges of legitimacy, and not moving out of there as quickly as the moment demands.
By Kevin Quinn. Originally published at EconoSpeak
I’m more and more convinced that the simplest way out of the debt-ceiling morass would be to start issuing perpetual bonds or consols (sometimes dubbed “Peter-Pan” bonds, since they never mature or grow up )which simply offer a fixed payment every year, with no face value. This would seem to be immune to court challenges — unlike the constitutional gambit or the platinum coin. The Republicans in the House are manifestly crazy, so there’s no hope there.
One question is how much bigger the term premium would be to borrow longer term in this way.
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In this game of chicken I expect both sides to close their eyes at the last second, expecting the other to yield. The crash will be epic.
No, it is the Administration that is the one that has to default by refusing to use emergency tactics like the platinum coin, consols, or just issuing debt and having a 14th Amendment fight. It will be Biden Admin lack of resourcefulness (or alternatively, in R parlance, failure to agree to cuts) that will cause a crash. So if the Administration does not engage in evasive tactics, it will agree to cuts.
Yes of course they will agree to the cuts. That’s the kabuki theater, as usual. They use this drama to cut budgets – all part of the corrupt rot.
Meanwhile, the DoD budget will increase, war & weapons appropriations go through. The trillions for “nuclear weapons modernization” won’t get cut. More billions for Ukro-Nazis will go through etc.
I recently read that a Union is going to sue Yellen. They are claiming the debt ceiling is unconstitutional, and that it is harming their members.
So perhaps sometime between now and June 1st a judge will decide the issue, by ruling it unconstitutional..
Could an instrument of this sort be used as collateral on the repo market? Given all the problems in the repo market since Sept 2019 (or since 2007?), if they stopped issuing high demand on the run treasuries used as collateral for repo transactions in favor of what would be a perpetual off the run instrument, would this solution potentially throw another wrench in the repo market and risk a credit crunch?
The thought occurs that Treasury could also issue long-maturity very-high-coupon bonds that would be bid up by the Primary Dealers to a multiple of face value.
That may even work that. With the economy getting, ahem, wobbly and how for years now institutions have been running around the world and throwing all that loose wealth into anything that might possible yield a return, the thought of a bond that gave a reliable fixed payment each and every year with the full backing of the US government might be seen as a safe refuge. Perhaps a secondary aim is to try to attract back the money that has been leaving the US over the past year or more because of the theft of Russian assets. That spooked a lot of wealthy people that.
I don’t see how that works with the underlying interest rate. Peter Pan bonds are still bonds. The dollars paid in annuities will inevitably buy less. Imo again, the only value to the dollar is social and environmental well being. It’s delusional to think the interest rate has much significance at all. Except for the great cotton candy machine (finance; Das). If the right wing would turn left once in a while they wouldn’t get so dizzy.
Have yet to have anyone provide an understandable explanation why reaching the debt ceiling means a default. It seems like any maturing debt can be rolled over into new debt within the existing ceiling, and there is plenty of cash flow to pay interest unless the gov’t chooses not to. I mean, DoD could sit on invoices or we could do the same furlough Kabuki we do when appropriations aren’t passed.
Heh, Holland issued perpetual bonds in the 1600s, a few of of which are still being held and collecting payments.
https://en.wikipedia.org/wiki/Perpetual_bond
Until 2014, England had a few outstanding that originated in the 1700’s:
https://en.wikipedia.org/wiki/Gilt-edged_securities#Undated_gilts
Perceptual bonds have a principal amount that is the basis of the coupon payments and is the amount the issuer must pay in order to stop making the payments. Is there a reason that principal amount would not count towards the debt ceiling limit?
I don’t see why one has to adhere to the old legal structure, particularly since as I indicated, stripped Treasury interest payments are a traded instrument.
Just authorize payments for a fixed time period, like $10 million a year for 20 years. No need to have a principal amount or have them be perpetual. Not hard to derive a price for that instrument from the market.
Yves,
Just because the republicans in the house want fiscal prudence does not make them any more crazy then the dems in the house. Both sides are equally crazy for sure!
We need fiscal prudence or there will eventually be a default anyway. So why not start now? POTUS should lower spending.
With all due respect, this is the wrong way to view the issue. “Prudence” is part of treating the government as a household, which it is not. As we’ve explained, the constraint on the Federal government is not the ability to run deficits, in fact, it needs to to make up for the strong propensity of the business sector to under-invest. It needs to focus spending (or at least enough spending) on things that will expand the productive economy, like infrastructure and eduction. Instead, we have terrible roads, decrepit bridges and trains, expensive broadband, and higher education looting….oh, and big bucks for foreign misadventures, starting with Ukraine.