The debt ceiling dance has started again. Read Treasury Secretary Janet Yellen in the Wall Street Journal.
A modest proposal: Issue perpetuities.
The Treasury computes the total amount of debt by its face or principal value, not its market value*. If the Treasury issues a bond that pays $1 coupons each year for 10 years and then pays $100 at maturity, the treasury counts this as $100 additional debt. The Treasury ignores the coupon payments, and how much the bond actually sells for, i.e. how much the Treasury actually borrows, when the bond is auctioned.
Now you see my answer: Perpetuities have coupons, but no principal. A perpetuity pays $1 forever. In reality, it pays $1 until the Treasury buys it back.
The Treasury could also issue coupon-only debt, just the $2 coupons for 10 years. Or it could issue debt with huge coupons and small principal payments, $2 a year for 10 years and then an additional dollar in year 10, and say debt increases by $1. But perpetuities are great for all sorts of other reasons, so why not use this opportunity?
Perpetuities can have fixed coupon payments or variable coupons. The Treasury could sell a perpetual bond whose interest rate equals SOFR (the new Libor), whatever the Fed is paying on excess reserves, etc. If the Treasury wants to borrow short to harvest temporarily low short-term interest rates, then floating-rate perpetuities do the trick. Of course I would rather also take this moment to start borrowing long, locking in absurdly low interest costs.
The Treasury could lower debt outstanding now, by rolling debt into perpetuities, issuing new perpetuities, and buying debt on the open market, issuing perpetuities in return. Goodbye debt limit.
Too clever? Maybe. OK, undoubtedly yes. But if economics lunchroom talk can consider trillion-dollar coins, we can talk about perpetuities. Or maybe a serious attempt to do this would bring US treasury accounting into the 1960s, with cutting-edge concepts like market values not face values, duration not average principal maturity, and interest cost concept that goes beyond coupons, so that the debt limit and treasury accounting is more economically meaningful.
Disclaimers:
*I spent some time on google and the Treasury website trying to figure out just how debt subject to limit is calculated, and this is my best guess. If I'm wrong, please write and I'll issue a classic "never mind."
Yes, I am guilty here of having the same answer in response to different questions. See here on why I like perpetuities for other reasons.
John,
ReplyDeleteAny liability issued by the Treasury that pays a monetary form of a return on investment is considered a liability of the Congress and subject to Congressional limits.
And the reason is that Congress has sole authority over the spending powers of government - see US Constitution Article 1, Section 8:
"The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defense and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States..."
"The Treasury could lower debt outstanding now, by rolling debt into perpetuities, issuing new perpetuities, and buying debt on the open market, issuing perpetuities in return. Goodbye debt limit."
No, perpetuities that pay a coupon would still be subject to a debt limit set by Congress.
From a Constitutional perspective, the Treasury (under Secretary Yellen) could sell zero coupon securities that are redeemed through the IRS in fulfilling a tax liability. These would not be considered subject to limit set by Congress since they carry an element of risk and since there is no cash settlement.
perpetuites paying a fixed coupon of say 3%, could be soold well above par. They would be booked at par. The cash could be used to redeem maturing short term debts at par.
DeleteWhat does well above par value even mean for a perpetuity? I am still scratching my head on that one.
DeleteOkay, so you pay $100 for a perpetual bond that pays $3.00 every year out to an infinite time horizon and the principle is never returned. Did you purchase the bond above or below par?
Is there a call option built into the perpetual? You pay $100 and the government has a call option to buy back the bond at $25 - something like that? The call option is treated as the par value and so you are paying 4X that to purchase the security.
I am not a finance guy so bear with me please. The par value on a fixed term bond is simply the principle repayment. I can only speculate on what par value means for a perpetuity.
i am not going to write a text book on financial math. I will leave that to Mr. Cohcrane.
DeletePlease believe me when I tell you that the value of a perpetual stream of fixed identical payments (e.g. $1/yr in perpetuity) is the annual amount divided by the market interest rate.
Let us say that the market interest rate for perpetuities now is 2% (today 30 yr treasuries traded at 1.85%). $1/yr. @ 2% perp has a present value of (1/0.02) or $50.
What I am proposing is issuing a perpetuity with a nominal face amount (par) of $1,000 paying an annual interest payment of $30.
The value of bond would be $30/0.02 = $1,500. There would not be a call as that would make the bond a finite term instrument. However, the holder could easily have a put to use the bond at face to pay obligations to the treasury, such as taxes. That would protect the value of the bond if market interest rates rose.
The account books of the treasury would show the liability as $1,000. The $1,500 (see Mr. Wright's comment below) could redeem $1,500 of maturing T-bills.
I realize that this is a fiddle and that a private corporation would probably not be able to get away with it. But, any port in a storm, and we have a big one blowing up around us.
Well, with no call option it sounds like Treasury could list the value of the perpetual liability at whatever they want to: $1,000 liability, $10 liability, -$50,000 liability ($50,000 asset), etc., etc since it never faces redemption.
DeleteWell okay. Treasury could also gather up old newspapers from around the capital each day, value them each as a $100,000 asset on the books, and the net financial position of the federal government would improve drastically.
Or Treasury could simply gather up old newspapers from around the capital each day, value each one as a $100,000 asset and pretty soon the government's balance sheet is looking pretty good :-)
DeleteActually your last point is interesting. The US does not count assets against the national debt. So add up the value of federal lands, national parks, etc. and say "we're not in debt after all." Of course that invites adding up the value of promised social security health pension and other promises to say we're over the debt limit by about $100 trillion or so...
DeleteThat's great!!! I have a few thousand in government bonds - instead of taking cash I will settle for a piece of the original Declaration of Independence.
DeleteOr I could go old school and demand payment in gold specie - but wait, Nixon closed the gold window. Did he close the payment in government land and physical properties window as well?
Can we accept that government bonds are claims on a government's revenue stream derived from taxation?
Perhaps Mark Wright can weigh in again - when Nixon closed the gold window were all other forms of non-tax compensation to bond holders eliminated as well?
John,
Delete"Of course that invites adding up the value of promised social security health pension and other promises to say we're over the debt limit by about $100 trillion or so..."
Well, as long as we are talking about perpetual securities - social security health pension and other promises out to a perpetual time horizon are infinite. Likewise tax revenue out to a perpetual time horizon is also infinite.
The difference between social security and generic run of the mill government bonds is a difference in incentives, not a difference in how they affect the solvency of the government.
In 1939, the debt limit was added as Title 31 of the U.S. Code. Section 3101(b) defines the debt limit as "[t]he face amount of obligations issued under this chapter and the face amount of obligations whose principal and interest are guaranteed by the United States Government."
ReplyDeleteThis language remains today. However, in 1989 (See section 2 of H.R.3024 "An Act To increase the statutory limit on the public debt, and for other purposes," enacted August 1989), after issuing long term zero coupon bonds in support of Mexico's Brady deal, the language was amended to redefine the face value of "any obligation issued on a discount basis" to be "the original issue price of the obligation, plus the portion of the discount on the obligation attributable to periods before the beginning of such month" [punctuation omitted].
This language does not appear to apply to any debt security sold at a premium (which seems to open up some possibilities for issuing low face debts at very large premia).
The Treasury publications are a little hard to follow. When I last tried to confirm this a few years back, I noted that Table FD-1 of the U.S. Treasury Bulletin presented estimates of the "net unamortized premium and discount" of all Federal debt securities. By contrast, note 3 of Table II of the Monthly Statement of the Public Debt of the United States explains that, in computing the debt limit, an adjustment is made only for " the unamortized discount on marketable Treasury Bills and zero-coupon Treasury Bonds."
I wrote some of this up in a paper with Camilo Alvarez, Daniel Dias, and Christine Richmond which I'll send along at some point.
This is great, thanks! A bit of explanation for others. The Treasury does issue bills, that have no coupons. A promise to pay $100 in a year sells for, say 99 cents, to provide a one percent interest rate. The accounting does take care of that, and call it 99 cents of debt and a one percent interest payment. The accounting, I take it, does not take care of my opposite possibility, that the amount the treasury borrows is a lot higher than the promised principal ($100) payment, due to very high coupons. Send link to paper, or put it in a comment.
DeleteMark,
DeleteThanks for the reply. I thought at some point the Treasury had sold long term zero coupon securities but when and why had escaped me.
So it sounds like from your description, for zero coupon bonds, the debt limit includes the original issue price plus accrued returns if I am reading correctly.
Mr. Chocrane: "A promise to pay $100 in a year sells for, say 99 cents" I think you meant $99.
DeleteDarn. Yes of course thanks for posting that out
Deletep.s. To come back to your suggesting of using perpetuities, when the British government has issued perpetuities (e.g. "consols") they were issued with a "face value" and a coupon rate. I am not sure what the accounting treatment would be in the U.S. But a low face value high coupon rate perpetuity would seem to work as you intend.
ReplyDeleteThese were all retired recently: https://www.theguardian.com/business/2014/oct/31/uk-first-world-war-bonds-redeemed.
Also, to state the obvious:
ReplyDelete"But if economics lunchroom talk can consider trillion-dollar coins, we can talk about perpetuities."
The power to coin money also resides with the Congress (including trillion dollar coins).
Everything else aside, how exactly would you do a SOFR floating rate bond without face value? (Maybe with a multiplicative instead of additive spread, like "30x SOFR"?) :)
ReplyDeleteSo there was an infinite money tree, after all.
ReplyDeleteThis comment has been removed by the author.
ReplyDeleteIf an instument has an issuer call, it is not a perpetual. For valuation, it will be deemed to be the tenor of the earliest call date.
DeleteThis comment has been removed by the author.
DeleteAnother "Modest Proposal" -
ReplyDeletehttps://www.gutenberg.org/files/1080/1080-h/1080-h.htm
"I have been assured by a very knowing American of my acquaintance in London, that a young healthy child well nursed, is, at a year old, a most delicious nourishing and wholesome food, whether stewed, roasted, baked, or boiled; and I make no doubt that it will equally serve in a fricasee, or a ragoust."
Has it comes to this, that we must spell out literary allusions? To those not aware, and before this blog is canceled for advocating cannibalism, let us be clear that Swift was not serious in this proposal, and meant only to illustrate contemporary hypocrisies. From Wikipedia " This satirical hyperbole mocked heartless attitudes towards the poor, predominately Irish Catholic (i.e., "Papists")[2] as well as British policy toward the Irish in general." Just how serious I am with my proposal you will have to judge by yourself, with the allusion in the title as a little hint.
Delete"To those not aware, and before this blog is canceled for advocating cannibalism..."
DeleteThat's funny, you had no problem suggesting that the US start a war with the Chinese to justify US investment in math and science education. Why wasn't the blog canceled for that alone?
Maybe the US should adopt a level of cannibalism to justify US investment in culinary education?
Or maybe you should put down your keyboard a second and rethink everything you ever learned about economic policy.
Government bonds are a rivalrous good (just like small children in Swift's tale are rivals for the limited amount of food available for Irish and British citizens). While government bonds they have their place (for instance serving as a pension for injured war veterans) they become an obstacle to intelligent fiscal and monetary policy.
Instead of deciding that a government should sell more rivalrous goods like bonds, you might consider that government should sell non-rivalrous goods.
But apparently you can't teach a war dog economist some new tricks.
John,
ReplyDeletePerpetuities are long term debt. Long term debt has higher annual interest rates than short term debt.
And so replacing current debt with perpetuities would actually increase the burden that debt has on the government as the annual burden of paying interest on government debt would increase.
That bug is a feature. If interest rates rise, perpetuity coupons do not rise. The US is immune from doom loop debt mechanics. The Fed can raise rates if needed without tanking the budget. Also floating-rate perpetuities, as explained in the post, carry short term interest rates. If we want to continue with no insurance against rising rates, it's easy to do.
Delete"If interest rates rise, perpetuity coupons do not rise". Yes, but in this case debt prices in the secondary market (you have to take into account the secondary market for perpetuities, since it will be the only source of liquidity for investors) will go down.
DeleteSo basically, you are shifting the risk from the government to the debt investors. For this shift to result in a lower cost, you have to hypothesize that investors are in a better position to hedge and manage this risk that the government.
I very much doubt this being the case. Government has very powerful tools to manage this risk.
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DeleteOEE,
Delete"...and managing the money supply such that the rate of inflation remains low, and approximates zero on average."
Treasury sells equity, private investor buys equity from Treasury, Treasury uses money from private investor to retire government debt held by Federal Reserve. Monetary aggregates and federal debt fall irrespective of the wishes of the central bank.
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DeleteAlready did. And I pitched it to Larry Summers and Paul Krugman and John Cochrane and Alan Greenspan and Paul Ryan and Barrack Obama and Alan Simpson and Erskine Bowles and Alice Rivlin and a whole host of others.
DeleteI thought that J. Cochrane with Libertarian leanings and being an adjunct scholar of the Cato Institute might be interested in the idea or at least provide some logical argument pointing out fallacies in what I am proposing, but so far - nil.
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Delete"You've had no takers. That should inform you."
DeleteIt should inform me of what exactly? That when they say the world is flat, I should believe them because....?
"If the basic example fails, as it has done..."
If fails because it has been tried or because you have a vested interest in it never being tried?
Look, you have already said you are not interested as a buyer which is fine. I find it revealing enough that you did not treat John's perpetual bonds sold at a premium proposal with the same level of derision. Nobody should be coerced into buying anything they don't want to buy (including the primary dealer banks).
"If the basic example fails, as it has done, the projector puts up ever more intricate versions of the same basic idea in hopes of persuading the sceptical audience."
First, has it occurred to you that you that maybe (just maybe) you are not the intended audience and instead just an onlooker?
Second, are you are from Canada (with no US tax liability)? I don't know that with any certainty, but you recent posts seem to indicate so. If you live in Canada, then it makes perfect sense that you would have no interest in purchasing securities that can only be used to fulfill a US tax liability.
Last, you asked what I meant by government equity, I went to the trouble of explaining it detail to you. I believe that I have addressed all of your inquiries.
I have had no takers trying to convince these guys and gals the world is round either:
Deletehttps://en.wikipedia.org/wiki/Modern_flat_Earth_beliefs#International_Flat_Earth_Research_Society
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DeleteOEE,
Delete"Shall we agree that we have explored this idea to the fullest extent possible consistent with notions of time and tide"?
Fair enough. But please answer one question - has what I am describing actually been tried at some time or place in history? I understand tax farming and previous attempts at it, but that is not what I am describing.
You probably know who Daniel Ellsberg was, but aside from his infamy with the "Pentagon Papers" he also has a decision theory named after him:
https://en.wikipedia.org/wiki/Ellsberg_paradox
"Ellsberg's findings indicate that choices with an underlying level of risk are favoured in instances where the likelihood of risk is clear, rather than instances in which the likelihood of risk is unknown. A decision maker will overwhelmingly favour a choice with a transparent likelihood of risk, even in instances where the unknown alternative may produce a larger utility. Given a particular set of choices in which each choice carries known and varying levels of risk, people will still prefer choices with calculable risk, even in instances with a lower utility outcome."
In a nutshell, Mr. Ellsberg postulates that people care more about self directed success than absolute returns on investment. I would rather push my own boat into the lake to take my chances at fishing rather than pay a charter boat and professional to do the fishing for me.
And that is what the equity I describe offers - a chance for the individual to improve his / her returns on investment because of his / her own productive capacity - not because he / she picked the right stock or mutual fund to invest in.
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DeleteOEE,
Delete"For your proposal to gain traction, you must convince the government, not the idle public, on the merits of the proposal for the government. I have yet to see an argument to that effect (i.e., that the government in the form of the secretary of the treasury will be better off by offering GEqty than by offering T-notes) from you in relation to the concept that you are promoting."
From the Government's perspective, GEqty is a better financing option than GBonds and the reason is that the underlying risk is born by the individual purchaser rather than taxpayers as a whole. Even today, the federal government sells a mix of short term T-Notes and longer term GBonds.
I assume you remember George Bush's pledge - "Read my lips, no new taxes" which he subsequently reneged on? The reason he had to reneg on that promise is that the interest payments on government debt (both T-Notes and Bonds) were consuming a growing portion of available tax revenue. Those payments are guaranteed by the 14th amendment and as such, subsume all other forms of government spending.
"The secretary of the treasury will do better than even odds if the proportion of forward contracts expiring out of the money exceeds 22.264%."
You are missing the point. The federal government is not an investment bank looking to profit off of the voting public. The point is the difference in incentives between GEqty and T-Bills / GBonds.
"This is in the way of speculation, not productive activity."
When you purchase equity shares of individual companies, are you speculating or are you investing in a productive enterprise?
With T-Bills / GBonds, the owner of the security barely has to lift a finger to collect his / her return on investment. With GEqty, the owner of the security must have some form of taxable income (via wages or other earned income) to see any benefit. And so when an individual purchases GEqty, they are "speculating" on their own future income derived from a productive purpose and associated tax liability.
In addition, GEqty allows monetary policy to operate independently of Treasury since monetary policy operates within the debt markets. If government is using GEqty for it's financing operations, then changes in monetary policy have no ill effects on the government's fiscal position.
"The secretary of the treasury is not one to engage in such idle speculation--it is not within her remit."
The Secretary of the Treasury should also not be one to engage in policies that undermine the independence of the central bank. The only way she / he can possibly do this is through the sale of equity.
"One way to 'beat the odds' is to buy only that number of GEqty forwards that the individual, or the firm, is certain (100%) that its future tax liability will exceed. From the Sec. of the Treasury's point of view, that's not a fair gamble with the public funds entrusted to her, and she would be better off not offering the forward contracts (see above)."
And if the Treasury Secretary is able to take the funds obtained from the sale of equity and retire existing government bonds - how is this not a fair gamble from both a government finance perspective and an independent monetary policy perspective?
"Because the intervening period from the date of purchase to the date of exercise is fixed and longer than the typical individual's or firm's planning horizon..."
??? Huh ??? Most people being saving for retirement as soon as they enter a workforce either through a pension or other retirement vehicle (some 30 to 40 years away). And you are saying that 5 years is beyond the typical individual's planning horizon?
OEE,
DeleteThe most elaborative example I can give is this:
An economy is composed of 100 people all paying the same amount in taxes and all owning the same quantity of government bonds. If all 100 people quit their jobs, where does the money come from to make the interest payments on those bonds?
A second economy is composed of 100 people all paying the same amount in taxes and all owning the same quantity of government equity. If all 100 people quit their jobs, then no returns are paid on the government equity holdings.
I presume that you are familiar with performance incentives built into a lot of professional sports contracts (start every game, run for 1000 yards, hit 30 home runs, etc.). These can be considered contingent contracts - you get paid, but only if you achieve the agreed upon target goal.
That is exactly what I am describing - a contingent contract sold by the Treasury where the target goal is for you to remain fully employed and have an associated tax liability.
OEE,
DeleteMy rationale for referencing the Ellsberg Paradox goes this way:
When a person purchases corporate equities he / she faces a multitude of unknown risks including future demand for the companies products, future financing needs for that company, future compensation due to employees, future price swings in materials that the company requires for production, potential future corporate malfeasance (fraud, product liability, etc.), and a whole host of unknown risks.
When a person purchases equity from the Treasury as I have described it, the only risks the person must consider are their own future employment and tax liability.
And so even though a person may obtain better expected utility from purchasing corporate equities, he / she may still elect to purchase equity from the Treasury given the opportunity because the risks are better understood by that person.
From the Wikipedia article:
"...people intrinsically dislike situations where they cannot attach probabilities to outcomes...favouring the bet in which they know the probability and utility outcome..."
If I purchase government equity, I have a better handle on the probability of my bet being successful and the utility I gain from a successful bet.
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DeleteOEE,
Delete"How likely is it that J. Yellen might sell the government on underwriting a GEqty issue in the next three years of the president's term in office?"
If she actually believes in central bank independence, then there is a strong probability. If she is just parroting what every other central banker has said then there is little to zero probability.
Judging by her recent comments saying that the federal debt ceiling should be eliminated, I would say she is just parroting what she has heard around the water cooler.
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DeleteOEE,
Delete"I don't see any correlation between your proposed 'government equity' and 'central bank independence' (such as it is)."
The central bank / FOMC would be precluded from purchasing government equity - see Federal Reserve Open Market Operations here:
https://www.federalreserve.gov/aboutthefed/section14.htm
In addition, changes in the discount rate set by the Federal Reserve (set administratively) would have no direct effect on the rate of return offered by Treasury on the equity that it sells.
"The similarity between your description of government equity and U.S. Savings Bonds is notable."
The significant difference being the incentives involved in purchasing and holding savings bonds and the incentives in purchasing and holding government equity.
"As a contract, Congress would have to pass legislation authorizing the issuance of "government equity". Yellen, J., may weigh in on the pros and cons, benefits and costs, but congress is the ultimate gate-keeper in the case of "government equity". Can't get around that--it's laid down by the U.S. constitution--and can't be delegated except by legislation.".
Nope, the power delegated specifically to Congress under the US Constitution is the power to borrow (US Constitution Article 1, Section 8). Equity sold by the US Treasury would not constitute borrowing any more than equity shares sold by GE, or Microsoft, or any other corporate interest constitutes borrowing.
OEE,
Delete"As a contract, Congress would have to pass legislation authorizing the issuance of government equity."
Tell that to Robert Rubin. Back in 1997 when he was Treasury Secretary, he authorized the sale of TIPS and inflation indexed bonds without any legislation enacted by Congress.
The problem with that is that the inflation component paid on those bonds constitutes an expenditure that was not explicitly authorized by Congress. And so, a compelling legal case can be made that TIPS and Inflation Indexed Bonds are not legitimate and constitute a infringement on the power to spend given to Congress.
The government equity that I describe does not infringe on any Constitutional power given to Congress.
If Robert Rubin can sell TIPs without Congressional authorization, then Janet Yellen can certainly sell equity without Congressional authorization.
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DeleteOEE,
Delete"This is the fatal flaw in your logic. The holder does not receive an undivided share in the residual assets of the issuer (the U.S. government) at any time during the life of the contract."
One asset of the US government is the tax revenue that they collect. And the equity that I propose is in fact a claim on that tax revenue.
And besides all that, even if you don't want to call it equity and instead call it forward tax contracts (FTC's) or some other acronym, the point remains that because what I describe would not constitute borrowing by the Treasury and because what I describe would offer no cash settlement, the FTC's would not infringe on any Constitutional power given to Congress.
Meaning (unlike TIPs), Janet Yellen (or some other Treasury Secretary) could sell them without Congressional approval.
Can we agree that the securities that I am describing would not be considered to be borrowing and would not be subject to the debt limit set by Congress?
DeleteIn lay terms, to borrow means to receive some good with the expectation of returning that good (possibly with interest) or a fungible equivalent at some point in the future. If I borrow a $100 bill, I am expected to return $100 in money at some point in the future. Because money is fungible I am not expected to return that exact same $100 bill.
Notice with the securities that I am describing, money is used to purchase the security, but no money is returned when the security reaches maturity. Instead the security is used to fulfill a tax liability. Hence no borrowing has occurred.
In addition, because there is no cash settlement, no spending unauthorized by Congress occurs when I redeem the security through the Treasury / IRS in fulfilling a tax liability.
Finally, it is already legally acceptable for the Internal Revenue Service to accept goods other than money in fulfillment of a tax liability - see:
https://www.treasury.gov/auctions/irs/index.html
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DeleteThis comment has been removed by the author.
DeleteOEE,
Delete"This is no different from any other contract that the government enters into--the government must have the authority from Congress.."
Then please point to the legislation that allowed Robert Rubin to begin selling TIPs TIPs in 1997. I went back through the legislation passed at that time and I could not find it.
https://en.wikipedia.org/wiki/List_of_acts_of_the_105th_United_States_Congress
OEE,
Delete"This is no different from any other contract that the government enters into--the government must have the authority from Congress (perhaps delegated to the executive branch) to enter into that contract, else, you should not expect to the contract to be honoured at maturity. Your choice of course."
Our system of laws protects any contract entered into by two willing parties (not just those legislated by Congress). And so in my mind, if Treasury sells FTC's and I purchase them, then our Congress and Judiciary would be bound by law to protect and honor those contracts as long as they don't infringe on the powers granted to Congress.
It remains an open question whether FTC's sold under one President / Treasury Secretary would be binding under a future President / Treasury Secretary. Meaning could Treasury sell FTC's under one President and then have the IRS refuse to accept them in discharging a liability under another President? Again, I would think that our system of laws protects contracts despite who or what party occupies the White House.
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DeleteOEE,
Delete"Larry Summers extolled the virtues of TIPS in a presentation on September 30th of 1997 here:"
Oh, well that must make it all okay then - all long as Larry Summers says it, we must accept it as unquestionable truth.
https://www.theguardian.com/science/2005/jan/18/educationsgendergap.genderissues
"All of the above strongly comports with the sense that U.S. TIPS are a run-of-the-mill debt of the U.S..."
Because Larry Summers says so? Well then, that answers that.
OEE,
DeleteBecause TIPs were not explicitly authorized by Congress and stipulated in legislation how holders of those securities were compensated regarding inflation, Congress can at any time change the terms of those contracts. If Larry Summers and Robert Rubin couldn't bother to get TIPs approved through legislation, then it seems to me that Congress can change the terms of those TIPs without consulting either Mr. Rubin or Mr. Summers.
For instance, it would be entirely legitimate for Congress to set the inflation component on TIPs at -10%, -30%, or whatever they would like so that they for instance could pay for their $3.5 trillion Biden spending plan.
There is no legislation saying that TIPs holders receive a fixed coupon payment plus a percentage based upon changes in the CPI, GDP deflator, or any other inflation measure.
For U.S. Savings Bonds which ARE a debt we see here:
Deletehttps://www.treasurydirect.gov/govt/charts/charts_debt.htm
This is a graph of the debt subject to limit published by the US Treasury.
It is broken down into marketable and non-marketable debt as follows:
https://www.treasurydirect.gov/govt/charts/principal/principal_mark.htm
Marketable securities consist of bills, notes, bonds, and TIPS. Non-marketable securities consist of Domestic, Foreign, REA, SLGS, US Savings, GAS and Other.
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DeleteOEE,
Delete"L. Summers would not have proceeded with TIPS in the absence of solid legal opinion that the issuance was legal..."
L. Summers was undersecretary at the time. The decision to issue / sell TIPs would have had to come from either Robert Rubin (Treasury Secretary in 1997) or President Clinton. And I am not a mind reader. I have no idea if Robert Rubin, Larry Summers, or President would have sought or did seek legal counsel regarding the sale of TIPs.
I do know that the Linkers in the UK were the inspiration for TIPs and the sale of those began in 1982.
https://citywire.co.uk/funds-insider/news/david-stevenson-i-wouldnt-touch-inflation-linked-bonds/a1524740
Is it possible that Robert Rubin saw that the UK had already established precedent and decided what is good for the UK is also good for the US?
"You will have to support your thesis that there is no legislation saying that TIPs holders receive a fixed coupon payment plus a percentage based upon changes in the CPI, GDP deflator, or any other inflation measure."
And that support would consist of what in your mind? If the legislation doesn't exist, then what further support could I possibly provide to convince you that it doesn't exist?
Like I said, I went through all of the legislation passed during the 105th Congress identified here and I could not find it:
https://en.wikipedia.org/wiki/List_of_acts_of_the_105th_United_States_Congress
Could it be buried as an obscure line in some unrelated Congressional legislation, that is certainly possible. When I reviewed the legislation above I tried to be thorough but it is possible that I missed it.
OEE,
DeleteYour words:
"This is no different from any other contract that the government enters into--the government MUST have the authority from CONGRESS to enter into that contract, else, you should not expect to the contract to be honoured at maturity."
Notice you did not say must have authority from Congress unless Larry Summers or Robert Rubin say it's okay.
And so a portion of my thesis is your own words.
"Your scenario of legislating minus 30% inflation on TIIS would likely not fit w/in the four corners of the constitution."
DeleteBecause Congress under the Constitution lacks to powers to borrow, tax, spend?
If a negative yield wrinkles your feathers, then fine it is a 30% tax on the principle value of the TIPs which is effectively a negative 30% yield.
If changing the terms of a contract before the contract has been fully settled is bothering you - Treasury Secretary Jack Lew already did it once specifically in regard to TIPs.
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DeleteThis comment has been removed by the author.
DeleteOEE,
Deletehttps://www.treasurydirect.gov/news/pressroom/pressroom_comnewmk.htm
Okay, I have seen that page before. It was where I first went to look for the legal status of TIPs. No legislation enacted by Congress is referenced in that press room announcement.
Acts of the 104th Congress can be found here:
https://en.wikipedia.org/wiki/List_of_acts_of_the_104th_United_States_Congress
Upon a cursory review, there is no mention of TIPs in any of the legislation listed on this page. Again, the authority could be buried in the text of some unrelated legislation.
Unfortunately, Wikipedia does not have a list of the legislation passed by the 103rd Congress. Clicking on the link here brings you to a blank page:
https://en.wikipedia.org/wiki/List_of_acts_of_the_103rd_United_States_Congress
"Clinton was a lawyer, Rubin was a lawyer and a former bank officer, and a former government official. Do you seriously think that they would have launched TIPS if doing so was ultra vires? "
Clinton was a lawyer who had impeachment charges brought against him.
Rudy Giuliani is a lawyer who has had his license to practice in New York and Washington DC suspended.
I am not so naive to believe that lawyers (or economists, or bank officers) are infallible.
"The 14th amendment section 4 prevents congress from revising the terms of debt previously issued."
No one bothered to tell that to former Treasury Secretary Jack Lew. As Treasury Secretary from 2013-2017, he changed the terms of TIPs such that if deflation occurred over the entire term of a TIP that had been sold, the owner would be refunded principle in full. That was not the case prior to his appointment as Treasury Secretary.
Or how about the Nixon shock? Prior to that point, payments on government debt held overseas were made in gold specie. Did the impeachment charges brought against President Nixon include a 14th amendment violation that he (along with John Connally, Paul Volcker, and Arthur Burns) all cooked up at Camp David? Did Paul Volcker's involvement in the Nixon Shock preclude him from serving as head of the Federal Reserve?
"That and the prospect of a complete meltdown in financial markets preclude the sort of action that you contemplate Congress undertaking."
I am not saying it would be a wise idea. I am saying that TIPs if they are un-legislated are not Constitutional AND leave the door open for Congressional abuse.
The mere fact that the minting of a $100 Trillion Platinum coin is being bandied about as a means of solving Congressional budget issues should be concerning enough, but at least a reasonably intelligent Central Bank could put the kibosh on that idea.
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DeleteOEE,
Delete"...the doomsday scenario that you postulate would occur if TIPS were not authorized via some article of legislation by the U.S. Congress at some point in the past..."
I really don't believe that legislation exists. I have read through the Acts passed by the 104th Congress, and I was unable to locate such legislation.
"...it's time to move onto other things..."
Such as - Joe Biden's budget plan? The upcoming debt ceiling fight in November / December? Monetization of government debt / monetary policy in general?
"I believe the proposal was for the minting of a $ 1 trillion coin of platinum."
DeleteNope, courtesy of some short sighted bungling by Congress during the Clinton administration, the U. S. Treasury is given cart blanche authority to issue platinum coins in whatever denomination they see fit. See:
https://en.wikipedia.org/wiki/Trillion-dollar_coin
"The concept of striking a trillion-dollar coin that would generate one trillion dollars in seigniorage, which would be off-budget, or numismatic profit, which would be on-budget, and be transferred to the Treasury, is based on the authority granted by Section 31 U.S.C. § 5112 of the United States Code for the Treasury Department to mint and issue platinum bullion coins in any denominations the Secretary of the Treasury may choose. Thus, if the Treasury were to mint one-trillion dollar coins, it could deposit such coins at the Federal Reserve's Treasury account instead of issuing new debt."
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DeleteHmmm. So perhaps the US puts up for auction "yield certificates," giving people the right to a check for $1,000 annually in perpetuity. They are not called bonds. Or the certificates give the right to not pay taxes of $1,000 annually.
ReplyDeleteStill, I think the easy way is just go to money-financed fiscal programs, or have the Federal Reserve keep its balance sheet rising indefinitely.
Is the Japan national government over-indebted? Why? The Bank of Japan owes 44% of the national debt.
Ben,
Delete"Hmmm. So perhaps the US puts up for auction yield certificates, giving people the right to a check for $1,000 annually in perpetuity. They are not called bonds. Or the certificates give the right to not pay taxes of $1,000 annually."
The $1,000 in money for one person to write a check comes from one or more other persons (taxpayers) - this is a rivalrous good aka privatized gains and socialized losses.
The reduction in taxes of $1000 for one person annually does not materially affect anyone else - this is a non-rivalrous good aka privatized gains and losses.
Please understand the difference.
Ben,
DeleteMilton Friedman in testimony to Congress when asked about interest expenditures on government debt basically said - "I can think of worse ways for government to spend money". He was of course referring to the Vietnam War in particular and the Cold War in general.
The Cold War is over, but the "war dog" economists who have been trained during that period (and periods prior) never adjusted their way of thinking regarding government finance.
Government bonds are a war time convention. And the reason is simple, facing conscription or a draft, an individual is going to want a high probability of repayment regardless of the outcome of the war or what injuries that person may be subjected to during it.
Post US civil war, many veterans came home with one or more missing limbs courtesy of amputations and cannon injuries. It was unreasonable for the government at that time to expect them to return to their farms / regular jobs and continue as if nothing happened. Hence the federal government (under Lincoln) legislated into existence pensions for these returning soldiers - the first modern US government bonds / entitlement program (roughly 70 years before the Social Security Act of 1935).
Later when the 14th Amendment to the Constitution was drafted, the following was included:
"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."
"But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void."
Not so sure about the fact that issuing perpetuities makes a great difference. Markets don't buy government debt because they expect their principal being repaid, they expect to get new government debt at maturity. So, they are, in fact buying "perpetuities": nobody expect the government paying down its debt. Ever.
ReplyDeleteIf the government issues only perpetuities the secondary market for this debt would become all relevant (even more than now) since it would be the only one providing liquidity to debt investors. The actual situation is pretty much the same with the Treasure being a very active "market maker" in this secondary market: just paying back some investors with the money provide by some new investors.
Not sure if the government getting out of this "debt market maker" role would be such a great thing. Government debt is already "perpetual" meaning the principal is never going to be repaid, very likely not even the interests are going to be repaid ... they are going to be "refinanced forever" (which sounds like a "perpetuity" to me).
And if, at some point in time, the government (in this "debt market maker" role) cannot "match" "debt sellers" (i.e. holders of debt reaching maturity) with "new debt buyers" it would be facing a problem that you can call “default”, but, if you don’t fall for a nominal fallacy, would be totally equivalent to a "crash" in the secondary government debt market in a world in which governments only issue perpetuities. Exactly the same effects:
* Government debt holders would face a shortcut
* Government would be incapable of financing their budget with new debt issues
* They will rely on the FED buying this “unmatched” bonds the market cannot absorb.
The more I look at it the more a I think we are already in a “government issuing only perpetuities” situation … just cheaper because of the “discount” that actual debt holders are willing to offer mislead by the “maturity fallacy” of actual government debt.
We will also be losing the useful information that the “yield curve” provides (or used to, maybe this information is, also, already lost)
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ReplyDeleteoooorrr.... Just issue a $100 Trillion Commemorative Coin, deposit at the Fed. If Congress doesn't like the spending, legislate reductions. Biden just walks into the press room holding the coin with both hands over his head like a communion host, say "Et cum spiritu tuo", hand it over to Powell who hands him a $100 Trillion receipt; and go on to the next crisis - perhaps terrorists at the Canadian border or whatever.
ReplyDelete