I propose a new structure for U. S. Federal debt. All debt should be perpetual, paying coupons forever with no principal payment. The debt should be composed of the following:
- Fixed-value, floating-rate debt: Short-term debt has a fixed value of $1.00, and pays a floating rate. It is electronically transferable, and sold in arbitrary denominations. Such debt looks to an investor like a money-market fund, or reserves at the Fed.
- Nominal perpetuities: This debt pays a coupon of $1 per bond, forever.
- Indexed perpetuities: This debt pays a coupon of $1 times the current consumer price index (CPI).
- Tax free: Debt should be sold in a version that is free of all income, estate, capital gains, and other taxes. Ideally, all debt should be tax free.
- Variable coupon: Some if not all long-term debt should allow the government to vary the coupon rate without triggering legal default.
- Swaps: The Treasury should manage the maturity structure of the debt, and the interest rate and inflation exposure of the Federal budget, by transacting in simple swaps among these securities.
Economists have long dreamed of interest-paying money. It fulfills Milton Friedman’s (1969) optimal quantity of money without deflation. Paper money is free to produce, so the economy should be satiated in liquidity...If the Treasury offers what are essentially interest-paying reserves, then we don't have to argue about the size of the Fed's balance sheet, ON RRP, etc.
Our economy invented inside interest-paying electronic money in the form of money market funds, overnight repurchase agreements, and short-term commercial paper, and found it useful. But that money failed, suffering a run in the 2008 financial crisis. Treasury-provided interest-paying electronic money is immune from conventional runs. Money market funds 100% backed by fixed-value Treasury debt cannot suffer a run...
By analogy, in the 19th century, the Treasury provided coins. Banks issued notes. Notes were convenient, being a lot lighter than coins. But there were repeated runs and crises involving bank notes. The U.S. government issued paper money, which might inflate, but cannot suffer conventional default or a run. That money eventually drove out private banknotes, and that source of financial crises was permanently ended. (Crises involving demand deposits did not end, but here the U.S. tried a different policy response, deposit insurance and risk regulation. It has not worked as well.)
In the 21st century, the Treasury has exactly the same natural monopoly in providing default-free and run-free electronically-transferable interest-paying money to private parties. It should do so.
Nominal perpetuities are a nice way to condense the hundreds of outstanding issues into one, which should increase their liquidity a good deal.
Indexed perpetuities are a cleaner way to implement today's tips.
The tax free analysis is maybe the most interesting. I put together a little tax clientele model with some interesting results. No, issuing tax free debt is not a present to rich people. By attracting the high tax clientele back to Treasury debt, we should see lower net (after tax) interest costs to the Treasury.
I have a nice implementation of Treasury swaps too, that might open them up a lot.
Comments welcome. It's a bit long because it responds to a previous round of comments, so if you're bubbling over with what's wrong with the proposals, do check that I haven't already answered your comment.