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Footnote 1 is not correct. A basis point is 1/100th of a percent. So if the treasury yield moves 15 bps it might move from 3.67% to 3.52%.

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founding
Jan 11, 2023·edited Jan 11, 2023

Maybe Matt will know that "finance guys" use basis points instead of percentage points because they aren't interchangeable. Finance girls also use basis points, but I guess that phrase doesn't have the same level of slight insult attached to it.

Addendum: There is also more nuance to the numbers behind the 10-year Treasury Yield chart Matt embedded. Since Treasuries aren't issued daily, there is some additional math needed to calculate the estimated 10-year yield between auction dates (there is a time factor to the calculation of underlying trading price of the Treasuries, which we don't need to get into here). See the helpful Treasury website for more. https://home.treasury.gov/policy-issues/financing-the-government/interest-rate-statistics

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Jan 11, 2023·edited Jan 11, 2023

Given the level of snark built on a factual error, as penance Matt ought to write a post about how more respect and appreciation should be shown for America's humble, hard-working finance professionals who hustle every day to ensure the American people, business and government can finance their ventures at competitive rates

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Heroes walk amongst us, disguised as normies.

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For anyone following at home: if a bond yield goes from 3% to 3.3%, you could say that it has gone up .3% (the raw difference) or 10% (the ratio, expressed as a percentage). It would be stupid for this to be ambiguous, so financiers use percentage points (and it’s division, basis points), to refer to the difference, and percent to the ratio exclusively: the yield went up .3 percent points, 30 basis points, or 10%.

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It's also just useful to normalize units. I thought basis points were weird when I entered banking, but once you realize most of the core profit math is yield spreads, basis points (bps) are a useful base unit. It's jargon but justifiable.

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This is as much about sales as anything. You're right (and others are right) to say it's for simplicity's sake we talk about 25 bps (not bips btw) instead of 0.25%. Sales usually gets paid on each deal as a commission. And that payment is based on a percentage of a deal or bps; putting in this manner makes it easier to figure what their commission will be.

To be a bit snarky here; sales guys (and in finance it's unfortunately usually guys) run the gamut from having "C.F.A level knowledge" about finance to "I don't think you'd pass a 7th grade math class". My father basically impressed upon me from an early age, you'd be extremely surprised out terribly even very smart people can deal with percentages and fractions.

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There's a lot of confusion out there about how percentages work. Your last sentence (almost) correctly expresses the difference between "percentage point" changes and "percent" changes.

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Mind blown. I always wondered!

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This is exactly it!

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founding

Matt Levine, the best "finance guy" writer around, is weighing in on Twitter regarding this:

https://twitter.com/matt_levine/status/1613148918530904066

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As someone who has done a lot of helping municipalities get around their debt limits by jacking up premium on bond issues, I totally agree that Matt Y is doing a lot of glossing over how easy it would be to just put insane coupons on long-dated bonds and try to maximize proceeds.

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I guess I was on the other side of the table! – advising municipal leaders not to do premium bond offerings/refundings due to the long-term damage they can cause to a municipality's credibility/finances. Plus premium bonds are negotiated, meaning you are paying extra bps right there.

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We must convene The Council of Discourse Matt’s.

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Wouldn't the female equivalent of a "finance guy" be a "finance doll"? (Imagine a pensive emoji here.)

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"When a finance guy says the yield is too high,

There's a finance doll walking by."

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I can't quite tell if this is an explicit reference to the song "Guys and Dolls" from the musical "Guys and Dolls". I'm having trouble making it fit in the tune, but it's great regardless.

My contribution:

"When a finance guy

says the yield is too high,

you can bet he'll be undercut by some doll.

"When a bro laments he can't get a good spread

chances are he is dead

'cuz he was out bid by a sis instead

"When a Wall Street schmuck

says "I'm down on my luck!'

after he bet the farm on a naked call

"Call it hedged, call it risky

but you could bet fine Scotch whiskey

that the guy lost his dough to a finance doll!"

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The premium generated calculation isn't right at all either. Firing up the old bond calculator shows that a hypothetical $100 ten year Treasury with a 27% coupon, yielding 3.79% would generate $291.70, which needless to say is way less than $712.

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Yes Matt is doing perpetuity math. That said the US could issue 100 year bonds which would approximate a perpetuity. Currently 30 years are the longest dated treasuries.

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Yes, unless I'm missing something the maximum *nominal* payout of a 10-year 27% coupon rate bond would be $370, so presumably that's the price ceiling at a zero discount rate, right? [Note: I could very definitely be missing something.]

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Also, the definition of yield is not correct. It's not simply the coupon in dollars divided by the price. You also have to include the amortization of discount / accretion of premium.

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Mint. The. Coin.

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With Karl Marx on one side and Daffy Duck on the other.

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I'd be very tempted to mint the coin with a picture of Trump on one side and the stars and stripes on the other and then wait for Trump to decide that the coin is cool and make them all accept it.

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I love this almost as much as I love Andrew Jackson, noted centralized banking haterz, on the face of the $20.

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Speaking of this, why does this absurdity still exist? Even Ted Cruz wanted to get him off this bill.

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Frederick Douglass. He's an example of somebody who's done an amazing job and is being recognized more and more

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Not gonna lie -- putting Douglass on a piece of US currency makes a lot more sense than Harriet Tubman. (Tubman obviously has an epic life story, but Douglass is a far more politically consequential historical figure by any plausible metric.)

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Tubman is one of very few African-American women of historical consequence from before 1900 or so. There are far more African-American men from that era (obviously, far fewer than there would have been if they had had legal or social equality in that era, but still many more than women).

Not that Douglass isn't more consequential than Tubman - but you can count African-American women from before 1900 who are important enough to be considered for the honor on one hand and not even use the thumb (Tubman, Truth, Wells and one finger left for whoever I forgot). You probably have to take your socks off for the men.

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Haha exactly. If republicans are gonna keep putting us through this asinine crap, we should treat it with the same lack of seriousness

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If maximum troll is the goal here then Dark Brandon seems like the clear winner to me. But Richard's idea of flexing Trump's ego is probably the best.

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I need this heist movie in my life. Especially the closing scene where they're standing around the table to divvy up the proceeds.

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founding

Mint three -- Reagan, Dubya, and Trump.

https://balkin.blogspot.com/2011/07/obamas-top-secret-plan-to-solve-debt.html

Honestly I think the best reason to mint the coin is so that we can offer a bargain where we eliminate unlimited coin seigniorage, while also eliminating the debt limit. (Just make it law that the Treasury can issue however much debt is required to satisfy Congress' appropriations.)

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I think the idea is that the treasury mints a coin and issues it to the fed to pay off some of the treasuries that the fed holds. This works so long as the fed holds treasuries, but what happens in 4 years when all the treasuries the fed holds have been paid off and the treasury needs to issue more debt?

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founding
Jan 11, 2023·edited Jan 11, 2023

You don't have to use the coin to buy bonds., and then issue new bonds to raise new cash You can literally just deposit the coin, and spend the cash. (This sounds inflationary, but isn't -- or at least, it's no more inflationary than the existing policy. The inflationary pressure comes from the fact that the government spends more than it takes in, and so the total nominal value of transactions goes up. Whether that turns into growth or inflation depends on whether the real productive capacity of the economy can keep up.)

Basically the Fed would just keep rolling over the quantity of debt that's authorized under the debt limit, and instead of issuing new bonds to make up the deficit, you'd mint coins.

In the _very_ long run, this would mean that the supply of T-bonds to serve as "risk-free" collateral for other parts of the finance system would shrink as a % of total global GDP, and eventually that might be a problem, but it would take _decades_ before that really mattered.

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Jan 11, 2023·edited Jan 11, 2023

The advantage of simply retiring fed held debt is that is purely a intergovernmental transaction that has no impact on the private market while creating space under the debt ceiling. Doing it the way you suggest is inflationary. Under normal circumstances, the government is taking private cash and converting it to government expenditures with private savings. In recent times the fed has used a stimulus policy where it increases the money supply by almost immediately by buying the treasuries from private savings (banks) and returning cash. But with the recent burst of inflation, the fed has reversed course to reduce inflation. It has been selling bonds it holds to collect private cash and reduce the money supply. If the federal government reverts back to a stimulus of government expenditures without collecting private cash (taxes or bonds), then the fed will have to raise rates even further to counteract the inflationary effect.

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The Fed could alternatively raise reserve requirements at member banks to fight inflation.

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I think banks would push back pretty hard on that. Higher reserves lower their profits while higher interest rates increase their profits.

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Yes, the banks hate it when the Fed raises reserve requirements. I'm just pointing out that the Fed has an anti-inflationary tool that is completely independent of needing to hold a reservoir of government bonds.

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We should challenge the constitutionality of the debt ceiling to prevent future shenanigans and prepare a platinum coin fail-safe to assuage the financial markets.

Section4, “ Validity of public debt” in the 14th amendment states, [1]

> 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.

Numerous constitutional law experts and politicians have made the argument that the debt ceiling violates this part of the constitution as explained in that Wikipedia section. There are certainly nuances beyond my legal comprehension, including how the debt ceiling was introduced to avoid congressional authorization of individual treasuries issuances, so I can’t speculate on how this could play out.

Further, there is the more general constitutional question of what should the Executive do when Congress passes contradictory legislation. E.g., mandating spending without authorizing sufficient funds, either through taxes or debt issuance authorization. It could be argued that the Executive has discretion in resolving this contradiction, including ignoring the debt ceiling.

To safeguard against global financial meltdown in the event of a suicidal judiciary decision, we can prepare and pre-annonunce a platinum coin fallback. In the event of an injunction barring new treasuries issuance beyond the debt ceiling, then we’ll simply purchase existing government debt from the Fed using a platinum coin and then retire those treasuries, thereby putting us back under the limit. Both the Treasury and the Fed will be standing by, ready to take these actions at a moment's notice.

[1] https://en.wikipedia.org/wiki/Fourteenth_Amendment_to_the_United_States_Constitution#Section_4:_Validity_of_public_debt

*edited to fix typo

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Constitutionality aside, it seems like there should be precedent for a situation that puts the President in the situation of having to choose between two illegal acts. Functionally, Congress is demanding the President do something illegal, just like passing a blatantly unconstitutional law. What happens next in that situation? Does the President refuse to perform the illegal act? Do nothing and wait for SCOTUS to weigh in? Instruct the Secretary of the Treasury to do something illegal in order to avoid doing something else illegal? Does she then resign?

At the end of the day, all Congress could do is impeach the President, but we've seen that it is impossible to remove him from office in the modern era. It seems like the only real threat here is the fallout from markets reacting to the uncertainty.

As Matt repeatedly said, this entire thing is profoundly dumb. It's the Spaceballs version of brinksmanship.

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The precedent is a government shutdown.

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Hitting the debt ceiling is not questioning the validity of the debt, it is merely a prohibition on taking on more debt - something that is clearly one of the constitutional powers of Congress.

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But Congress also mandated that certain amounts of money be spent. If the government can’t fulfill statutory obligations without breaching the debt ceiling, then there isn’t a clear legal solution outside of loopholes like Matt’s idea or the platinum coin.

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The legal solution is a government shutdown.

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Jan 11, 2023·edited Jan 11, 2023

No, because a government shutdown happens when Congress hasn’t passed a budget or continuing resolution. In that case Congress has not given authority for additional government functioning outside of certain mandatory programs. But that’s not what’s happening here. We’d still be under the previous budget/CR, which legally mandates certain spending levels.

Therefore a government shutdown in that instance would be illegal. But also taking on additional debt would be illegal.

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The government cannot spend money they do not have.

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So what happens when the government is legally required to spend money, but they don’t have it, and they aren’t allowed to borrow it?

A legal obligation to spend money because of laws passed by Congress is not optional.

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Definitely not! The government is not a computer from the first season of Star Trek. There is no legal authority for shutting it down.

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Thanks for explaining this - I agree that this is likely an elegant solution. Thinking as a lawyer (never a great way to start a sentence I know) may I suggest that another elegant solution is to rely on the full faith and credit clause to treat a debt ceiling breach exactly like a government shutdown.

At an extremely high level a government shutdown exists when the government runs out of statutory funding authority. Successive administrations has crafted a now standard legal regime whereby ending of statutory funding just stops non-essential government services. These have withstood scrutiny because no court would read the Antideficiency Act as mandating a catastrophe.

If the debt ceiling is breached there are very strong arguments that the full faith and credit clause prevents the government from defaulting on any debts it has incurred. However, the debt ceiling must still have some effect on new obligations so you could draw a very strong analogy to the legal reasoning behind government shutdowns and just close down non-essential work for the duration of the breach. If anything, the case for only shutting down non-essential work is stronger than with the Anti-Deficiency Act as the relation to the Full Faith and Credit clause is clearer. Similarly to with the Antideficiency Act, I very much doubt that courts would rule the debt ceiling statutory regime mandated a catastrophe.

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Yes, this is the simple, obvious answer. Congress has passed two statutes giving the president contradictory instructions. He can't comply with both so he has leeway to comply in spirit as much as possible, in the way that does the least amount of harm. It's not that complicated, and it's amazing how much ink has been spilled talking around this.

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Yes, this is like the "implied repeal" theory (new spending authorizations impliedly repeal the debt ceiling to the extent the authorized spending exceeds the old ceiling) I've advocated elsewhere. It's so straightforward that I find it bizarre that it gets literally no treatment in articles like this, not even to explain why it's wrong. (I mean, I'm certainly willing to believe there's some piece of SCOTUS authority out there saying that it wouldn't work, but I've never seen it.)

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Jan 11, 2023·edited Jan 11, 2023

Based on things he's tweeted, I think MY agrees with implied repeal, this high-yield bonds thing is a sort of compromise/sop to people who don't buy that theory but think the coin is too weird/kooky

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And of course you always see typos after the comment posts… I didn’t intend to refer to the “full faith and credit” clause but to Section 4 of the 14th amendment.

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Can anyone explain why the Dems didn’t already eliminate the debt ceiling? If the voters are uninformed enough to be unsure of who is at fault in this situation, then why would they care about 1 week’s worth of news stories about the Democrats getting rid of the debt ceiling entirely? The only thing I can figure is that Democratic leaders must believe it makes the Republicans look bad, which is true, but I doubt many elections will turn on this issue, and it just doesn’t seem worth the risk. On the substance, my two cents (ha) is that minting the coin in advance and letting the court process play out is a better approach than the interest rate method since as Matt mentions it will likely raise borrowing costs for everyone to some degree. Either way, doing either of these things well in advance of the showdown would be ideal to avoid rattling markets.

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founding

There is a hammer over in the closet. Your opponent will periodically go over to the cabinet, get the hammer out and start hitting themselves with it. You are perplexed, but they don't hit you with the hammer, only themselves.

I would keep the hammer around, as the Dems are also doing.

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Better analogy. Two people run a household where one person has more power than the other. The one with less power repeatedly threatens to burn down the house you both own together unless he gets his way. He has gallons of gasoline and kerosene and his threatening to light the house on fire. You say "Go ahead. The renters we have living in adjacent rooms will blame you for the disaster". The person with less power, lights a match which not only completely burns down the house, but causes the whole neighborhood to catch fire. However, instead of blaming the person who lit the match, the renters blame you saying you had all the power. Worse, they say the person who lit the match should be in charge because he said, "I alone can fix it". And oh yeah, since all the neighboring houses burned, the survivors turned to mob guys to fix their own homes and how some pretty dangerous people have moved into the neighborhood.

Long winded way of saying the commentator "theelasticstranger" has this right.

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This is one of the few cases where I would just say to dems (i.e., the administration) put out the fire, take away his matches, and dare him to accuse you of theft. As others sometimes say, the constitution is not a suicide pact.

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Also dare him to say "everyone will remember this" and retort back "will they though?"

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There is something to that, but I also believe a few moderates like Manchin believe the debt ceiling creates a bipartisan(ish) nudge towards a more balanced budget which they'd like to see.

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Joe Manchin and Sinema were never willing to just kill the debt ceiling.

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You’re probably right, but why? They can’t possibly be in favor of the hostage-taking. Could they just be misreading the politics?

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Their leverage is greatest in these types of fiscal negotiations. Maybe they just don’t like ceding power

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As Matt noted this was a normie dem position Obama held just a decade ago. If you think Medicare/SS should be reformed there aren't many opportunities that provide the air cover to make it a real possibility.

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There's lots of good stuff Democrats should've been able to do, but realistically needed 52 senators for.

I think this is on the list. There's just no way you'd get Joe Manchin to put the filibuster out of its misery in order to end the debt ceiling.

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Because there are some Democrats that support raising the debt ceiling, but only if it is bipartisan, because they want to have bipartisan cover and don’t want to be attacked as reckless spenders.

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Why should Republicans be in favor of removing the debt ceiling as an issue? They're quite aware that if Republicans control the White House, Democrats will never threaten global economic disaster to force Republicans to do anything. Only Republicans think this is a smart strategy, so they will never unilaterally disarm.

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This kind of Matt-splaining of complex or difficult issues is exactly why I subscribe. I don't always agree with his conclusions, but I enjoy and respect the analysis and insights. Thanks Matt.

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RemovedJan 11, 2023·edited Jan 11, 2023
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In an efficient market where the price of a high coupon bond reflects market yields, the effect is (economically) a wash. The amount borrowed is the same in both scenarios (e.g. $10 principal vs $3 prin + $7 premium). In the second scenario, premium is repaid in the form of very high interest payments instead of principal at the maturity, so it shortens duration (i.e. drags repayment times forward, on average), but it doesn't really change the total amount the government is on the hook to repay.

Math notwithstanding, it's all very unorthodox and prone to misunderstanding and bad reporting. But in a range of bad options, it is definitely not as bad as default and feels less silly than the coin, whatever the legal merits.

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founding

If it were entirely perpetuities, then the cost of debt service should stay exactly identical, though the face value of the debt (which means nothing on a perpetuity) would go down.

With debts that have a maturity, there would be a little bit of increase in the service costs to make up for the decreased face value, but the total monthly payments made on service and maturity should stay the same.

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The cost of debt service is why this sort of scheme should horrify progressives for the simple reason that a dollar spent on debt service cannot be spent on whatever new harebrained welfare idea they dream up tomorrow.

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My point is that debt service is a cost and just because we can afford to pay the interest doesn’t mean it’s a good way to fund government, except when it’s absolutely necessary, e.g., to combat a pandemic.

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RemovedJan 11, 2023·edited Jan 11, 2023
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“What I think you and I agree IS shameful for a government, though, is racking up absurd amounts of debt service that crowd out useful spending -- whether on lefties' "harebrained... idea[s]" or on Whatever Non-Lefty Spending That Tickles Ken's Fancy”

That’s more or less what I was getting at. Except I can’t think of any federal spending that I would support increasing except maybe basic research in the hard sciences. I would make significant cuts even to defense spending if I could do it my way.

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A crisis can be a fine thing if you sincerely want unpopular policies. Secession led to emancipation. World War Two and Nazism discredited white supremacy and led to desegregation.[1]. The Great Depression led to the doubling of federal spending. None of these policies had much support before the precipitating crisis, yet they all became consensus positions within a decade or two.

Provoking crises to get one’s way sounds like a risky ploy that only desperate and marginalized people would try. Yet American history has been exceptionally gentle-- we have emerged from every major crisis stronger than we entered it. This is really freaky-- France, Germany and Japan all endured privation during World War Two, and even Britain endured ten years of rationing and lost its empire. America is so powerful that we can squander $6 trillion in Iraq and Afghanistan without great loss of power or prestige. Republicans are more willing to provoke crises than French or German conservatives because we, unlike them, have weathered crises without catastrophe.

Still, the idea “America does well in big crises” is facile. There are too few data points to have any confidence that the next storm will pass as gently as the last. Perhaps this is why empires teeter and sometimes fail.

[1] It’s unclear whether desegregation would have occurred without the cold war. Jim Crow was antithetical to US efforts to win hearts and minds in East Asia.

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My two cents as a lawyer (commercial litigator, not constitutional) is that I've thought for many years that there's a pretty clear argument under ordinary statutory interpretation principles that Congress works an implied repeal of the debt ceiling to the extent it authorizes spending that exceeds the ceiling without providing any other mechanism to pay for it (e.g., higher taxes, authorizing sale of sufficient existing government assets, authorizing printing more money, etc.). There were a series of SCOTUS decisions in the 1970s finding that Presidents were constitutionally required to spend everything that Congress directed them to spend, so implied repeal is far more plausible under existing precedent than what appears to be the present Republican theory that the President has the inherent authority to decide how to prioritize spending.

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Does implied repeal mean that, if Congress passes a law mandating that the President take an action that violates a previous law, they are implicitly repealing the previous law?

I am curious how contradictory mandates are supposed to be resolved, because I could easily see a hostile state legislature trapping a governor by passing two laws such that acting on one violates the other as a pretext for impeachment. (Like passing a spending bill and then making it illegal to borrow money to spend.) And if I have thought about it, then surely many others have and there is obvious legal remedy.

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"Does implied repeal mean that, if Congress passes a law mandating that the President take an action that violates a previous law, they are implicitly repealing the previous law?"

Effectively, yes. Normally courts try to reconcile seemingly conflicting laws by finding a reasonable interpretation of the two statutes that lets both operate, but if that's not possible then a court may find that the later enacted statute has worked an implied repeal of the earlier law to the extent of the conflict. For example, if a municipality had an ordinance that said the minimum size of lots for R-1 zoning is 50 feet x 125 feet and then some time later passed a new ordinance that said the minimum size of lots for all residential zoning is 25 feet x 125 feet, that would almost certainly be deemed to have been an implied repeal of the earlier ordinance -- there's no plausible way to reconcile the two ordinances.

In the context of the debt ceiling situation, the argument would be that if the debt ceiling is, say, $10 trillion and the outstanding debt is $9.5 trillion, and then Congress passes a budget ordering $750 billion in spending in excess of what tax receipts will cover, then there's been an implied repeal of the debt ceiling for at least $250 billion. The implied repeal would be necessary because there are other statutory and constitutional limits on presidential authority that would limit alternatives for paying for the extra $250 billion in spending. (E.g., there are statutes restricting the ability of the executive branch to sell public assets or print money and constitutionally, per what are called the "Impoundment Cases," the executive branch *must* spend the entire amount authorized for various items by Congress unless Congress specifically gives the executive branch discretion to spend less than the full amount, so it would be highly questionable for the President to decide to pay some of the government's bills, but not others.)

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Does the fact that the president has the option to spend the money but stay within the debt ceiling via high yield bonds/trillion dollar coin mean the laws aren't actually in conflict?

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Jan 12, 2023·edited Apr 11, 2023

It would indeed if the high yield bonds and/or trillion dollar coin are considered legally valid approaches. I've seen lots of people insist the trillion dollar coin idea would be deemed unlawful by SCOTUS because the apparent loophole it relies on was really intended for minting collectible coins, not legal tender. The high yield bond thing is completely new to me as of this post, so I don't know what criticisms there might be of it. As I noted elsewhere here, I don't know what the law actually says about how treasury bonds are to be sold (Is the current approach dictated by statute? Regulation? Unwritten custom and practice?), so I can't assess that. That said, it's worth noting that under the high yield bond strategy, unlike the trillion dollar coin, the government would still eventually run into the debt ceiling because you need to sell more bonds to cover the interest payments!

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I'm bad at math but couldn't you just slice them ever thinner? Print the $.0000001 high-yield bond!

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I think Matt does a great job of emphasizing how boring and stupid it is that we're still talking about this, but I want to make a point of even further emphasizing how boring and stupid it is that we're still talking about this.

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I don’t think we should underestimate just how poorly a debt ceiling crisis could go. This is not a government shutdown. Instead, financial markets could go thermonuclear should the Treasury be forced to default on the safest financial asset in the world; the bedrock asset of our entire financial system. And we could trigger that meltdown even before an actual default as financial market participants position themselves for a potential default.

We already see signs of this repositioning as Tracy Alloway explained yesterday in, “The Bond Market Is Already Worrying About a Debt-Ceiling Debacle”, https://www.bloomberg.com/news/articles/2023-01-10/the-bond-market-is-already-worrying-about-a-debt-ceiling-debacle

> And while much of the concern in the market is — just like the discussion in D.C. itself — so far mostly just talk, there are some early signs of traders prepping for the possibility of a standoff on government spending, and potentially even a default on some shorter-term US debt.

We’ll see larger perturbations in markets as we get closer to a potential default. Those dislocations will reverberate all throughout global financial markets since US treasuries are foundational to the entire financial system. That could lead to liquidity (i.e., insufficient cash) and solvency (i.e., bankruptcy) issues for numerous market participants. That is what happened in the 2008 global financial crisis and treasuries are far more important than mortgages.

Hence, even just the possibility of a debt crisis and US treasuries default could cause an unimaginably larger financial crisis.

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I think if the Dow dropped 5000 points in a single day from fears of a debt ceiling catastrophe, that would sober the people in Congress enough to avert that idiocy. However, most traders would probably think that the *prospect* of the Dow dropping 5000 points in a single day would cause the people in Congress to sober up and avoid a debt ceiling catastrophe, so the Dow would most likely not drop 5000 points in a single day, sending the signal to the idiots in Congress (or Republicans, but I repeat myself) that the market is not that worried about a debt ceiling catastrophe, so full steam ahead.

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In 2008, the majority of Republicans in the House rejected Bush’s bank bailout plan (TARP) and it had to be passed by the Democrats. [1]

> The revised HR1424 was received from the Senate by the House, and on October 3, it voted 263-171 to enact the bill into law. Democrats voted 172 to 63 in favor of the legislation, while Republicans voted 108 to 91 against it

For context, Lehman failed on Sept 15th and the markets were already in meltdown mode by the time the majority of Republicans rejected TARP on Oct 3rd.

I do like to think that some Republicans would come to their senses before we had an even larger financial crisis due to the debt ceiling, but I certainly wouldn’t count on it. Further, the damage could already be done by the time enough responsible Republicans get on board. In that case we could be looking at another lost decade due to a financial-crisis-induced recession.

[1] https://en.wikipedia.org/wiki/Emergency_Economic_Stabilization_Act_of_2008#Second_House_vote,_October_3

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You’d think the Democrats would entertain the idea of controlling spending to avoid such a situation.

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The time to do that was when Congress passed the most recent budget. They knew what the debt ceiling was and what estimated tax receipts were. That they chose to ignore it suggests others should as well.

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Should?

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In fact, it suggests that the administration is obligated to do so. It is not for them to divine Congress's intentions.

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They need not divine the intent to borrow - if Congress did not authorize borrowing there is no authority to borrow.

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I wonder why the Republicans didn't seemed to be concerned about controlling spending when they raised the debt ceiling 3 times during Trump's presidency without drama. Now, as when Obama was President before Trump, something seems to be different about spending according to Republicans. I wonder what the real motivations of the GOP might be.

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Same as the Democrats: Stay in power whatever it takes.

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The Democrats have never resorted to financial terrorism however.

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Neither has anyone else.

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You mean Congress. If they want to change the legally mandated spending, they should go ahead and do so.

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I hadn’t heard that the Democrats proposed reduced spending.

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You mean Congress again.

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One in the same until about five minutes ago.

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Personally I'm still in favor of the platinum coin, because I appreciate one institution calling out another on its BS. Make a single 10g coin, say it's worth a septillion dollars. It won't affect inflation in the slightest because that money never enters circulation except to the degree Congress already approved or already had the power to approve in the future, it just changes a meaningless database entry.

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“ 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.”

That pretty much ends the debate. We could have a shutdown but the debt must be paid.

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I always thought they said basis point rather than percentage to more clear. You might say the bond rate increased 15 basis points (2.00 to 2.15) rather than increased by .15 percent (which could mean the same or could mean it increased from 2.00 to 2.03)

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"Percentage points" offers equal clarity as "basis points." The only difference is that 1 percentage point = 100 basis points. Finance guys talk in basis points because it's wordy to say something like "three-hundredths of a percentage point" or "zero-point-one-five percentage points."

"Percent" (by itself, no points) is the ambiguous phrasing, but Matt didn't use that phrasing in the footnote.

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Your bond math is all off. A 10-year bond with a 27% coupon is never going to be worth $712. The total amount of cash you’re going to get over the life of the bond is $270 of interest plus $100 of principal. If you pay anything more than $370, that’s a negative yield.

The actual formula for computing yield is more complicated than what you’re using. You need to list out the cash flows, then find a discount rate that gives those cash flows a present value equal to the market price.

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I've been wondering how hard rhetorically Dems will go when this crisis comes. Matt's final clause is usually phrased as "do not negotiate with terrorists", not "hostage takers". Calling the Republican fringe terrorists would be controversial but Biden already went to "semi-Fascist" and the discourse about right-wing domestic terrorism is already quite advanced.

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I think threatening a global economic disaster probably fits within a reasonable definition of "terrorism."

Let's remember that the only reason the Republicans think this is a smart strategy is because they assume that Democrats are so terrified of the horrific effects of a default that they would agree to things that are fundamentally against what Democrats believe in. That sounds pretty terroristic to me.

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