Theoretically, what would happen if they mint the coin, and then it gets stolen, Money Heist style? I assume we could just mint another, but would it have any impact that all of a sudden there's another trillion in circulation?
Given current market rates--about 4%--a 10-year bond with a face value of $100 and a 27% coupon would sell for about $288. While that's well below what Matt says, it does make the debt ceiling less immediately pressing. But debt service costs would explode, requiring Treasury to borrow ever more money to keep up. (Raising $1000 would add $93.75 to annual debt service costs, vs. $40 for a plain-vanilla 10-year bond.) How quickly the ploy turns self-defeating would depend on how market rates behave. The ploy buys time to deal with the underlying political and legal issue. It doesn't make the debt ceiling itrelevant.
My quick take: GOP might not fight against this proposal all that hard. The resulting rise (sharp rise?) in rates would dovetail nicely with their hopes for the next electoral cycle.
What about the Treasury sells a security that pays 0.0000000x% of GDP each quarter? Could that be argued as not being a "debt" subject to a "debt" ceiling. What if the Treasury sold and leased back the White House? Or Florida? Or some expensive military equipment? It would not be paying "interest" on a debt, but rent. We don't have a "value of property rented" ceiling.
I think this idea shines the most on t-bills (government borrowings with a term less than one year). The literally don't pay "interest" until maturity anyway, so by changing the stated rate, you aren't changing a single thing about the timing of the cash flows. It is literally 100% semantics. I would vote making them pay a Trillion percent interest and keep rolling them over. Anything that is high, but less than a hyper inflationary economy's government might pay, I think is just giving too much ammo to detractors to make incongruous real world comparisons.
The whole trick here is just acknowledging what is and has always been true: the face value of debt doesn't mean anything, just like the "par value" of common stock doesn't mean anything. The only thing that matters at any instantaneous point in time is the fair value of the debt and the yield. If you want to further describe the timing of debt service and how it is impacted by market dynamics, it is more accurately described by concepts like duration (first derivative of changing interest rates on a bonds fair value) and convexity (second derivative of changing interest rates on a bonds fair value). There is no world in which the face value of a bond is included in the set of best or most relevant pieces of information to have about a bond, unless you a writing a script for an old western where they are stealing bearers bonds from a safe on a moving train or something and you don't have enough time in the script to teach the audience finance.
The debt limit is the dumbest law ever - it's a law against arithmetic. Might as well pass a law saying pi is three.
I think Matt is wrong about Social Security. I'm not sure about Medicare and Medicaid, but Social Security has its own account. It currently owns bonds - it doesn't sell them. In fact, the Social Security law says that SS cannot sell bonds. If the trust fund runs out, and income from SS taxes is insufficient to cover benefits, benefits will automatically decrease.
"Well, when the Treasury Department first sells a bond, they say something like “We want to borrow $100 for 10 years — who wants to give us money?” There’s then an auction in which people can bid the interest rate they would like the government to pay them in exchange for their 10-year, $100 bond. The lowest bid wins, and that becomes the interest rate on the bond. "
Just out of curiosity, can someone who knows more about this than I do confirm this is how it works? I thought the face value and coupon (or "interest") rate were both fixed in the offering, and the bidding was on the price of the security (which then translates to a yield).
For example, see the announced results of a recent 10-year T-note (which is the same as a bond, but for some reason, US Treasury securities with a term greater than 1 year and less than or equal to 10 years are called "notes"):
It looks to me like the interest rate was fixed at 4.125% (or 4 "1/8%", how cute), and then the bidding is expressed in terms of the yield (which then determines the resulting price). The results notes the high yield of 4.140%, and also notes that lower yields (i.e. higher prices) than that were accepted in full.
Matt later says "The Treasury Department could basically flip the terms of the auction. Instead of saying “We want to sell a $100 perpetual bond, how much interest will you demand to give us the money?” they could say “I have this nice juicy $100 bond for sale that pays a 27% interest rate, how much are you willing to pay for it?” "
But isn't that how it works now? The face value and interest rate are fixed as part of the offering, and then investors bid on how much they will pay. Right? I know just enough about this to know that I'm not confident.
1 - I can't find any prominent earlier mentions of this idea. Is this out-of-the-box trial balloon getting launched by MY?
2- Per an on-line bond price calculator, a 10 yr note with a 40% coupon seells for about 4x face value. A 30 yr 40% coupon at about 7.5x face value.
So if, for example, $50 billion of bonds issued in 1993 mature next year, they can be re-funded by roughly $7 billion of 40% coupon 30 yr bonds. That knocks $43 billion off the total debt, which is somenting but is it significant?
3- In addition to legacy debt, the Treasury is raising new money. What are projected ten and thirty year auction totals for 2023? If it is, eg, another $100 billion but with premium bonds the face value could be "only" $16 billion, that is another $84 B made available. Again, is this productive or a drop in the bucket?
FWIW, after about twenty minutes of googling around I decided this is a bigger research project than I'm likely to pursue. But I'd love to see some answers!
"This is pure, uncut nonsense. Congress controls federal spending through the Social Security Act and through annual appropriations. Congress controls federal revenue through the tax code. "
I agree that we should eliminate the debt ceiling; however this comment is too cute by half after a year when President Biden is attempting to forgive over 500 billion dollars in student loan debt and has repeatedly extended a pause on student loan interest payments. All of which added to the debt significantly. Now you can waive your hands and say that Congress gave the President the Authority to do this, but you can't say absolve the executive of Responsibility for doing it because Biden could have chosen not to and was in fact urged not to by Republicans.
I suspect someone who has a financial interest in an institution holding assets of a certain value would have standing to sue over the validity of a dubious bond if it were part of that institution’s portfolio.
This is great and much better than minting the coin. But the coin would be inflationary because it would be just a means of paying bills by printing money instead of raising it through bond sales.
But for this method, the true yield and interest rate could be filled in after the sale. I don’t think it would be inflationary.
But wait, if you’ve reached the debt limit already then how can you do this because you still need to issue more face value debt and infinitessimal is still larger than zero?
That is true, and I am jumping off from Mart’s point here, but as long as you do this *before* reaching the actual limit, this method could be used to issue low face value bonds and the proceeds could be used to purchase and retire face value bonds in the secondary market.
THIS METHOD COULD BE USED TO LOWER THE FACE VALUE OF OUTSTANDING DEBT SO WE NEVER HIT THE DEBT CEILING.
Joe Biden should instruct the Treasury Department with plans to do this about a week or two before we hit the actual debt ceiling.
Why stop at issuing bonds with a higher coupon? The Treasury runs something called the STRIPS program where they separate out the interest payments from the principal payments on their bonds. This way an investor could buy either interest-only ("IO") or principal-only ("PO").
Could the Treasury do the following:
1. Issue a bunch of bonds
2. Use the STRIPS program to separate IOs from POs
3. Buy back all the POs
In the end, they have effectively borrowed an amount of money equal to the market value of the IOs but they haven't increased the face value of outstanding debt.
Your section on the Obama era follies is actually related to your post yesterday about West Wing. Namely, one reason everything played out the way it did in 2011 at least on the Democratic side is Obama surrounded himself with advisors who cut their teeth politically during the Clinton years. There were just way way too many people in the Obama administration who believed a 1996 welfare reform esque bill could be passed (after all wasn't Newt a firebrand as well) and that this would redound to Obama's benefit the same way it supposedly helped Clinton's political fortunes.
Unfortunately, these advisors had some extremely wrong lessons from the 90s. One, they hadn't reckoned with how much the make-up of the GOP had changed and how much the extreme members drove the bus (a canary in the coal mine of the current house leadership fight. Ask John Boehner). Second, a fundamental misunderstanding of why swing voters voted for Clinton in 96 and why Clinton had such sky-high approval in his second term; extremely good economy combined with backlash to GOP overreach with the Lewinsky scandal.
Lastly, I think everything that's happened since 2011 has pretty definitely shown that very few people actually give a flying F**K about the deficit and debt; outside of ways it may directly affect them. As Matt has noted, given current inflationary environment, cutting spending has more currency then it did even a year ago (though with inflation coming down and interest rates possibly coming down in the Spring, that may not be true by the time the debt ceiling fight reaches a crescendo). Point is, cutting debt and deficits should be done purely based on the good medium- and long-term outcomes it could generate. Short term political considerations should have no bearing as very clearly, swing voters do not care one iota (nor should they).
And the long run would be to run a near zero structural deficit! To do so will need to come mainly through taxes, ideally progressive consumption taxes,
Take this with a grain of salt if you wish, but I think the "Pod Save America" guys had some interesting thoughts on this (say grain of salt, as they were speechwriters for Obama, so you can say everything they talk about is suffused with bias towards anyone associated with Obama, including Biden. But I digress). The reason I say this as due to their previous roles, I thought they were able to give some pretty good "inside baseball" as to why the concessions McCarthy gave to the GOP holdout/lunatics were so dangerous.
First, the biggest concession was the one related to the rules committee. By getting three spots, the usurpers have an enormous amount of power of the rules of debate; including any bills related to the "debt ceiling". So we potentially have a situation that in order for a "debt ceiling" bill to get the floor, the remaining GOP congressmen who are not the lunatics, will have to vote with Democrats to the get the bill to the floor. And given the current dynamics of GOP primaries, this is a giant invitation for GOP House members to get primaried given its unforgivable sin to work with Democrats on anything that might make it to a Fox News segment.
Second, I think they sobered me a bit on the "solution" of a discharge petition. I actually do think this is how the debt ceiling will eventually get raised. But they pointed out that it's not a simple process. A bill has to be introduced and it has to be stuck in committee for 30 days before a petition can be filed. And then if it fails, you don't get to try again. In other words, a Democratic congressman/woman needs to get a bill now before the committee to give enough time.
My final takeaway from the beginning of this podcast is that at the end of the day, we'll probably find some way to raise the debt ceiling, but we might have a 2011 level showdown before that happens. But the bigger issue could be a very protracted and ugly government shutdown that could be quite damaging.
Theoretically, what would happen if they mint the coin, and then it gets stolen, Money Heist style? I assume we could just mint another, but would it have any impact that all of a sudden there's another trillion in circulation?
Given current market rates--about 4%--a 10-year bond with a face value of $100 and a 27% coupon would sell for about $288. While that's well below what Matt says, it does make the debt ceiling less immediately pressing. But debt service costs would explode, requiring Treasury to borrow ever more money to keep up. (Raising $1000 would add $93.75 to annual debt service costs, vs. $40 for a plain-vanilla 10-year bond.) How quickly the ploy turns self-defeating would depend on how market rates behave. The ploy buys time to deal with the underlying political and legal issue. It doesn't make the debt ceiling itrelevant.
My quick take: GOP might not fight against this proposal all that hard. The resulting rise (sharp rise?) in rates would dovetail nicely with their hopes for the next electoral cycle.
What about the Treasury sells a security that pays 0.0000000x% of GDP each quarter? Could that be argued as not being a "debt" subject to a "debt" ceiling. What if the Treasury sold and leased back the White House? Or Florida? Or some expensive military equipment? It would not be paying "interest" on a debt, but rent. We don't have a "value of property rented" ceiling.
I think this idea shines the most on t-bills (government borrowings with a term less than one year). The literally don't pay "interest" until maturity anyway, so by changing the stated rate, you aren't changing a single thing about the timing of the cash flows. It is literally 100% semantics. I would vote making them pay a Trillion percent interest and keep rolling them over. Anything that is high, but less than a hyper inflationary economy's government might pay, I think is just giving too much ammo to detractors to make incongruous real world comparisons.
The whole trick here is just acknowledging what is and has always been true: the face value of debt doesn't mean anything, just like the "par value" of common stock doesn't mean anything. The only thing that matters at any instantaneous point in time is the fair value of the debt and the yield. If you want to further describe the timing of debt service and how it is impacted by market dynamics, it is more accurately described by concepts like duration (first derivative of changing interest rates on a bonds fair value) and convexity (second derivative of changing interest rates on a bonds fair value). There is no world in which the face value of a bond is included in the set of best or most relevant pieces of information to have about a bond, unless you a writing a script for an old western where they are stealing bearers bonds from a safe on a moving train or something and you don't have enough time in the script to teach the audience finance.
The debt limit is the dumbest law ever - it's a law against arithmetic. Might as well pass a law saying pi is three.
I think Matt is wrong about Social Security. I'm not sure about Medicare and Medicaid, but Social Security has its own account. It currently owns bonds - it doesn't sell them. In fact, the Social Security law says that SS cannot sell bonds. If the trust fund runs out, and income from SS taxes is insufficient to cover benefits, benefits will automatically decrease.
"Well, when the Treasury Department first sells a bond, they say something like “We want to borrow $100 for 10 years — who wants to give us money?” There’s then an auction in which people can bid the interest rate they would like the government to pay them in exchange for their 10-year, $100 bond. The lowest bid wins, and that becomes the interest rate on the bond. "
Just out of curiosity, can someone who knows more about this than I do confirm this is how it works? I thought the face value and coupon (or "interest") rate were both fixed in the offering, and the bidding was on the price of the security (which then translates to a yield).
For example, see the announced results of a recent 10-year T-note (which is the same as a bond, but for some reason, US Treasury securities with a term greater than 1 year and less than or equal to 10 years are called "notes"):
https://www.treasurydirect.gov/instit/annceresult/press/preanre/2022/R_20221109_2.pdf
It looks to me like the interest rate was fixed at 4.125% (or 4 "1/8%", how cute), and then the bidding is expressed in terms of the yield (which then determines the resulting price). The results notes the high yield of 4.140%, and also notes that lower yields (i.e. higher prices) than that were accepted in full.
Matt later says "The Treasury Department could basically flip the terms of the auction. Instead of saying “We want to sell a $100 perpetual bond, how much interest will you demand to give us the money?” they could say “I have this nice juicy $100 bond for sale that pays a 27% interest rate, how much are you willing to pay for it?” "
But isn't that how it works now? The face value and interest rate are fixed as part of the offering, and then investors bid on how much they will pay. Right? I know just enough about this to know that I'm not confident.
I have several questions:
1 - I can't find any prominent earlier mentions of this idea. Is this out-of-the-box trial balloon getting launched by MY?
2- Per an on-line bond price calculator, a 10 yr note with a 40% coupon seells for about 4x face value. A 30 yr 40% coupon at about 7.5x face value.
So if, for example, $50 billion of bonds issued in 1993 mature next year, they can be re-funded by roughly $7 billion of 40% coupon 30 yr bonds. That knocks $43 billion off the total debt, which is somenting but is it significant?
3- In addition to legacy debt, the Treasury is raising new money. What are projected ten and thirty year auction totals for 2023? If it is, eg, another $100 billion but with premium bonds the face value could be "only" $16 billion, that is another $84 B made available. Again, is this productive or a drop in the bucket?
FWIW, after about twenty minutes of googling around I decided this is a bigger research project than I'm likely to pursue. But I'd love to see some answers!
"This is pure, uncut nonsense. Congress controls federal spending through the Social Security Act and through annual appropriations. Congress controls federal revenue through the tax code. "
I agree that we should eliminate the debt ceiling; however this comment is too cute by half after a year when President Biden is attempting to forgive over 500 billion dollars in student loan debt and has repeatedly extended a pause on student loan interest payments. All of which added to the debt significantly. Now you can waive your hands and say that Congress gave the President the Authority to do this, but you can't say absolve the executive of Responsibility for doing it because Biden could have chosen not to and was in fact urged not to by Republicans.
I suspect someone who has a financial interest in an institution holding assets of a certain value would have standing to sue over the validity of a dubious bond if it were part of that institution’s portfolio.
This is great and much better than minting the coin. But the coin would be inflationary because it would be just a means of paying bills by printing money instead of raising it through bond sales.
But for this method, the true yield and interest rate could be filled in after the sale. I don’t think it would be inflationary.
But wait, if you’ve reached the debt limit already then how can you do this because you still need to issue more face value debt and infinitessimal is still larger than zero?
That is true, and I am jumping off from Mart’s point here, but as long as you do this *before* reaching the actual limit, this method could be used to issue low face value bonds and the proceeds could be used to purchase and retire face value bonds in the secondary market.
THIS METHOD COULD BE USED TO LOWER THE FACE VALUE OF OUTSTANDING DEBT SO WE NEVER HIT THE DEBT CEILING.
Joe Biden should instruct the Treasury Department with plans to do this about a week or two before we hit the actual debt ceiling.
Why stop at issuing bonds with a higher coupon? The Treasury runs something called the STRIPS program where they separate out the interest payments from the principal payments on their bonds. This way an investor could buy either interest-only ("IO") or principal-only ("PO").
Could the Treasury do the following:
1. Issue a bunch of bonds
2. Use the STRIPS program to separate IOs from POs
3. Buy back all the POs
In the end, they have effectively borrowed an amount of money equal to the market value of the IOs but they haven't increased the face value of outstanding debt.
What happened here?
Your section on the Obama era follies is actually related to your post yesterday about West Wing. Namely, one reason everything played out the way it did in 2011 at least on the Democratic side is Obama surrounded himself with advisors who cut their teeth politically during the Clinton years. There were just way way too many people in the Obama administration who believed a 1996 welfare reform esque bill could be passed (after all wasn't Newt a firebrand as well) and that this would redound to Obama's benefit the same way it supposedly helped Clinton's political fortunes.
Unfortunately, these advisors had some extremely wrong lessons from the 90s. One, they hadn't reckoned with how much the make-up of the GOP had changed and how much the extreme members drove the bus (a canary in the coal mine of the current house leadership fight. Ask John Boehner). Second, a fundamental misunderstanding of why swing voters voted for Clinton in 96 and why Clinton had such sky-high approval in his second term; extremely good economy combined with backlash to GOP overreach with the Lewinsky scandal.
Lastly, I think everything that's happened since 2011 has pretty definitely shown that very few people actually give a flying F**K about the deficit and debt; outside of ways it may directly affect them. As Matt has noted, given current inflationary environment, cutting spending has more currency then it did even a year ago (though with inflation coming down and interest rates possibly coming down in the Spring, that may not be true by the time the debt ceiling fight reaches a crescendo). Point is, cutting debt and deficits should be done purely based on the good medium- and long-term outcomes it could generate. Short term political considerations should have no bearing as very clearly, swing voters do not care one iota (nor should they).
And the long run would be to run a near zero structural deficit! To do so will need to come mainly through taxes, ideally progressive consumption taxes,
Take this with a grain of salt if you wish, but I think the "Pod Save America" guys had some interesting thoughts on this (say grain of salt, as they were speechwriters for Obama, so you can say everything they talk about is suffused with bias towards anyone associated with Obama, including Biden. But I digress). The reason I say this as due to their previous roles, I thought they were able to give some pretty good "inside baseball" as to why the concessions McCarthy gave to the GOP holdout/lunatics were so dangerous.
First, the biggest concession was the one related to the rules committee. By getting three spots, the usurpers have an enormous amount of power of the rules of debate; including any bills related to the "debt ceiling". So we potentially have a situation that in order for a "debt ceiling" bill to get the floor, the remaining GOP congressmen who are not the lunatics, will have to vote with Democrats to the get the bill to the floor. And given the current dynamics of GOP primaries, this is a giant invitation for GOP House members to get primaried given its unforgivable sin to work with Democrats on anything that might make it to a Fox News segment.
Second, I think they sobered me a bit on the "solution" of a discharge petition. I actually do think this is how the debt ceiling will eventually get raised. But they pointed out that it's not a simple process. A bill has to be introduced and it has to be stuck in committee for 30 days before a petition can be filed. And then if it fails, you don't get to try again. In other words, a Democratic congressman/woman needs to get a bill now before the committee to give enough time.
My final takeaway from the beginning of this podcast is that at the end of the day, we'll probably find some way to raise the debt ceiling, but we might have a 2011 level showdown before that happens. But the bigger issue could be a very protracted and ugly government shutdown that could be quite damaging.
Yeah, I mean there is a 100% chance of a several-week government shutdown this year. Debt ceiling breech 50% chance.