Monday, September 20, 2021

Debt ceiling modest proposal -- perpetuities

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.  


75 comments:

  1. John,

    Any 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.

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    1. 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.

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    2. What does well above par value even mean for a perpetuity? I am still scratching my head on that one.

      Okay, 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.

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    3. i am not going to write a text book on financial math. I will leave that to Mr. Cohcrane.

      Please 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.

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    4. 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.

      Well 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.

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    5. 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 :-)

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    6. Actually 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...

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    7. That'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.

      Or 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?

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    8. John,

      "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.

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  2. 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."

    This 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.

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    1. 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.

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    2. Mark,

      Thanks 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.

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    3. Mr. Chocrane: "A promise to pay $100 in a year sells for, say 99 cents" I think you meant $99.

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    4. Darn. Yes of course thanks for posting that out

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  3. p.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.

    These were all retired recently: https://www.theguardian.com/business/2014/oct/31/uk-first-world-war-bonds-redeemed.

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  4. Also, to state the obvious:

    "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).

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  5. 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"?) :)

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  6. So there was an infinite money tree, after all.

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  7. A perpetual bond (or, preferred stock) has a fixed coupon payable at set dates, and a face value which is also the redemption value (in most cases), but no fixed redemption date (maturity date).

    If issued by a commercial bank, the perpetual may be counted as tier 1 capital.

    The 1821 British consol issue is said to have had a face value of ₤100 (the redemption value), and no specified redemption date. It paid ₤3 annually.

    Suppose, that long maturity government bond is priced at the market at 3% per annum. Suppose, that you are the Secretary of The Treasury (U.S.) and Congress has authorised you to issue a series of bonds that have no specified maturity date (i.e., a perpetual bond). Suppose that you have determined that the Treasury needs $1,000,000,000 this year. You decide to issue a new series of U.S. Consols at $50 face value at 3.25% per annum; and you decide that the first series of this new consul should be issued in the total amount of $100,000,000. Two million consols are to be issued to raise $100,000,000 at auction. The nominal interest payment is $3,250,000 per year in perpetuity or until Congress decides to redeem the issue at face value.

    How much has the unused debt limit been reduced by when this series is issued? How much has the consolidated U.S. government debt been increased by? What are the specific benefits that the perpetuity offers to the government?
    [Answers: $100,000,000. $100,000,000. No specific redemption date--allows the Treasury to redeem the bond as and when it is opportune to do so; provided the issue is auctioned, the bond is sold at fair market value; redemption at par value (or face value) is a matter of the terms and conditions of the bond indenture--however, it may provide a capital gain or loss to the holder of the bond if the coupon rate is lower or higher than the then-current market rate of interest on six-month bills.]

    The U.S. Treasury issued a 4% Consol in 1877 that was not redeemable until 1907, after which date it was redeemable at face value ($50.00) at any time. It had no specified maturity date or redemption date.
    See: https://en.wikipedia.org/wiki/Consol_(bond)

    Perpetuals are not unusual, but not commonly issued. The U.K. had retired (redeemed) all of its consols by the end of 2015. There are sixty-six perpetual preferred share issues trading on the TSX (Toronto Stock Index) at present.

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    1. If 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.

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    2. The British consuls had issuer calls (redemptions). The 1877 U.S. consul had a restriction on redemption for 30 years after which date the consuls could be called. There are no perpetual fixed income securities lacking in the issuer's right to redeem said securities.

      How you value it depends on your view of the future. British consuls were called and redeemed after 100 years. Using any reasonable discount factor, over that period of time, would not inform the price of the security. The length of the time period between announcement of the redemption and the redemption date was six months. What is the likelihood that you could accurately call the date that the redemption notice will be given in any year, in any 5-year period, in any 20-year period? Slim to nil, would be my guess.

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  8. Another "Modest Proposal" -

    https://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."

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    1. 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.

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    2. "To those not aware, and before this blog is canceled for advocating cannibalism..."

      That'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.

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  9. John,

    Perpetuities 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.

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    1. 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.

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    2. "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.

      So 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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    3. "If we want to continue with no insurance against rising rates, it's easy to do."

      "Insurance", or "self-insurance" is obtained, not from financial engineering of the federal debt structure, but by applying budget discipline (lacking at the present moment) and managing the money supply such that the rate of inflation remains low, and approximates zero on average.

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    4. OEE,

      "...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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    5. Pitch it to Janet Y., FRestly. But take out a U.S. patent on it first--you can't copyright an idea.

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    6. Already 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.

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    7. I 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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    8. You've had no takers. That should inform you. I've pointed out where it fails and why it fails, as a market security. Your counter-argument is that what you have provided in terms of "examples" are not to be taken as representative of the whole proposal. Well, people tire of being led down the 'garden path' with 'teaser' examples. 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. It won't wash, and it hasn't. "GEqty" cuts no ice, FRestly. On the other hand, you could always try the Papal Office--it might go where the protestant capitalists won't.

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    9. "You've had no takers. That should inform you."

      It 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.

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    10. I have had no takers trying to convince these guys and gals the world is round either:

      https://en.wikipedia.org/wiki/Modern_flat_Earth_beliefs#International_Flat_Earth_Research_Society

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    11. FRestly, I file with the IRS annually. If you recall, I spent some effort coming to grips with your proposed "GEqty" cash-in-advance income tax forward contract. I put the complete mathematics on this board in another of John's blogs. I've taken the time to understand the dynamics and I believe that I have provided a fair assessment of the proposed contract. I would have to search back through John's blog posting to find the one proposing perpetual debt, but I believe, if memory serves me correctly, that I pointed out that the nearest real bond market security that filled that niche was the British "consol" (short for "consolidated debt", and euphemistically describe as a "gilt"). I provided examples of Canadian issue "perpetual" securities (preferred shares) by banks in that country and the reason why those issues were attractive to the issuer (fulfills the requirement for 'Tier I capital' at a low cost). I noted that the British "consol" and the Canadian 'perpetual preferreds' are redeemable at the option of the issuer, and one commenter responded by asserting that in his (Australian) opinion those issues don't meet the "down-under" definition of a 'perpetual'. Back to John's proposal to have the U.S. Treasury issue 'perpetual bonds'--one reason he is attracted to that is his belief that the U.S. Treasury could garner the needed cash inflow while paying back less than it brought in on a book basis. I recall that I pointed out that the perpetual securities had a par value ("preferreds") or face value ("consols"--the 1877 $50 Consol issue) that would be paid when redeemed or called by the issuer. None of the securities issued had a fixed date for repayment; and, I noted that the last issue of outstanding British perpetual "consols" were redeemed on (I seem to recall) 60-day's published notice.

      I don't believe that I have spent more time on "GEqty" than on John's blog postings (I continue to work through the materials on "the fiscal theory of the price level", for example). And, I do post rather detailed comments, few of which receive much attention (I note). I pull them down after a bit of time. Since you address remarks directly to me, in response to my remarks on John's blogs or in response to my remarks on some of your comments, I feel obliged to respond to you. One thing leads to another, and here we are. But you are quite right, "GEqty" is not what I would look to in an investment, and as I pointed out in an earlier response, I am not a buyer for it. If I anticipate a future tax liability five years out, I may put a portion of my wealth aside to take care of it if and when it comes up, but I would not, ever, make the type of commitment you describe as "government equity". Nor could I recommend it to others.

      Shall we agree that we have explored this idea to the fullest extent possible consistent with notions of "time and tide"?

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    12. OEE,

      "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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    13. The Ellsberg Paradox is designed to highlight the fallacy of a decision based solely on the "expected utility" of engaging in a game of chance, under uncertainty.

      I don't know that your conclusion "that people care more about self directed success than absolute returns on investment" is the testable proposition in the Ellsberg Paradox. It doesn't read that way, to my understanding of the purpose of the experiment at the heart of Ellsberg's thesis.

      You assert that "...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... (etc.)." The statement baffles me. What you refer to as "government equity" has little to do with an individual improving his/her return on investment "because of his/her own productive capacity." The firm or the individual is speculating on a future outcome, not engaging in a productive activity as that term is understood in ordinary usage.

      You begin by assuming that there is an individual or a firm that anticipates a tax liability in the fifth year after date, and that there is a secretary of the treasury who anticipates that she can do better by catering to the risk aversion of the individual or firm by entering into a five-year forward contract in the expectation that the money she receives today will be greater than the money that she expects to pay out five years hence to the counterparty of the forward contract, compared to her next best alternative which is a treasury note issue having a yield to maturity of 0.963% per annum (as of 9/30/21). Assuming zero-coupon securities, a 6% discount rate on the forward contract value, a 5-year term to maturity (or exercise date), the certainty equivalent payout on the tax credit forward is 1-0.22264 (rounded) under continuous compounding. 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%. The individual or the firm entering into the forward contract does better if the number of contracts expiring "in the money" exceeds 77.736%. This is in the way of speculation, not productive activity. The secretary of the treasury is not one to engage in such idle speculation--it is not within her remit.

      From the Ellsberg Paradox, it fits the "no objective calculable risk" game. The future taxable income S(T), where T is the maturity or exercise date of the forward, is a Levy process with unknown parameters. This fits the description of the Urn which has 30 red balls out of a total of 90 balls with the remainder made up of a mixture of yellow and black balls in unknown proportions. Because GEqty is non-transferable there is no re-insurance market. 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, the consequences of a miscalculation or a mis-estimate are not trivial (as they are in the Ellsberg Paradox games). 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).

      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. Perhaps you have made that argument and I have overlooked it.

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    14. OEE,

      "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?

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    15. OEE,

      The 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.

      Delete
    16. OEE,

      My 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.

      Delete
    17. «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.»

      Have you modelled that? What is the disutility of GEqty if your bet is unsuccessful?

      Here is your problem: E{U[X(T)] - U[Y(0)/βᵀ]} = {p1.U[X(T)] + p2.U[0]} - U[Y(0)/βᵀ]
      where, β = 1/(1 + r) and r is a risk-free rate of return during the interval [0,T], and Y(0) is the amount invested in GEqty at t = 0, and X(T) and 0 are the payoffs of GEqty at t=T with probability p1, and p2, respectively.

      If your subjective utility of money in the future gives greater weight to risk (i.e., you are a risk-taker; you have a convex utility function for large sums), then you will take the gamble. If, on the other hand, your subjective utility of money in the future gives less weight to risk (i.e., you are a risk-avoider; you have a concave utility function for large sums), then you will avoid the gamble. Given the relative sizes (dollar volume) of the government debt and public equity markets which of 'risk-taker' or 'risk-avoider' characterizes the principal participants and thereby suggests the likely take-up of GEqty?

      Step out of your own shoes, and step into the shoes of others. 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?

      -- Sean-shúil Iolair ("OEE")

      Delete
    18. OEE,

      "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.

      Delete
    19. I don't see any correlation between your proposed 'government equity' and 'central bank independence' (such as it is).

      GEqty ~ U.S. Savings Bonds -- non-transferrable, non-market, and low appeal to firms and sophisticated investors. From "Investopedia", the U.S. Savings Bond is described as an debt instrument ---
      "Features of U.S. Savings Bonds
      "Non-Marketable: The U.S. savings bond was designed to be non-marketable, meaning that an investor can only purchase the bond directly from the U.S. government and cannot sell it to any other investor. The bond, in effect, cannot be transferred, as it represents a contract between the investor and the U.S. government. This direct relationship ensures that the U.S. savings bond does not fluctuate in value. Therefore, an investor would receive his original investment if he redeemed the bond. Furthermore, any lost or damaged savings bond certificate can be reissued or replaced, since the bond is registered with the government."

      The similarity between your description of "government equity" and "U.S. Savings Bonds" is notable. Using the accrued interest paid at maturity to fund student tuition at a college or university avoids taxation of the earned interest. U.S. Savings Bonds can be redeemed at the election of the investor, but with a penalty of three months of interest if redeemed prior to the fifth anniversary after date of purchase. The principal value of a U.S. Savings Bond is not subject to loss, as it is in the case of "government equity" if the tax liability at the date of maturity of "government equity" contract is less than the face value of the contract. So, there are important differences in terms of the obligations on the parties to the contracts and the terminal value of the contract payments.

      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.

      Delete
    20. OEE,

      "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.

      Delete
    21. OEE,

      "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.

      Delete
    22. If Robert Rubin can sell TIPs without Congressional authorization, then Janet Yellen can certainly sell equity without Congressional authorization.

      Delete
    23. FRestly, what you are proposing that the treasury sell as "equity" isn't equity. There is no ownership conveyed in a forward contract other than the right to put the contract value at maturity back to the government if the holder has a tax liability due to the government in payment of that liability, if there is a liability in fact due at that time.

      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.

      The comparison to Microsoft equity shares or IBM common stock is nil. Those " equities" and your concept of "government equity" are not commensurable. Your concept is simply a forward contract with a variable and uncertain payoff at maturity; furthermore, like U.S. Savings Bonds, it is a personal (non-negotiable, non-transferrable) contract that unlike U.S. Savings Bonds is not redeemable before the maturity date. Call it what it is, not what it isn't. Desist in the word games.

      Delete
    24. OEE,

      "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.

      Delete
    25. 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?

      In 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

      Delete
    26. FRestly, you assert (above) the following:
      "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."

      Re-read your description of the instrument you are endeavouring to promote. It is not a claim on "tax revenue" of the United States government. It's a forward contract--an individual or a firm enters into a forward contract with the U.S. government (Sec. of the Treasury or her delegate) for which there is an exchange -- money is paid in advance to the Secretary and in exchange the payor receives a right to deliver the contract to the IRS five years later to offset the payor's then current tax liability (if any) to the U.S. government. The forward contract price paid at the outset of the contract is the future exchange value ($1.00) discounted at an annual compound rate of interest of 6%; the forward contract is personal to the parties to the contract and cannot be redeemed for value prior to maturity, sold for value or assigned or hypothecated; if the payor's tax liability at the maturity date is less than exchange par value ($1.00), then the value at maturity is the lesser amount which is equal to the holder's tax liability or zero which ever is greater. The forward contract is non-transferrable, and non-assignable.

      The foward contract does not give the holder a claim on the tax revenues of the U.S. government. It is a prepayment of a future tax liability.

      Delete
    27. FRestly, you wrote: "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."

      It would foolhardy of the tax payer to enter into a forward contract with the Sec. of The Treasury absent explicit legislation granting the Sec. the authority to charge such forward contracts as obligations of the United States government (14th Amendment).

      The key word is "obligation" of the U.S. government. If you wanted to have that forward contract exchangeable for a future tax liability, you will want that contract authorized by the U.S. congress through legislation. 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.

      Delete
    28. OEE,

      "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

      Delete
    29. OEE,

      "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.

      Delete
    30. FRestly,
      Larry Summers extolled the virtues of TIPS in a presentation on September 30th of 1997 here: https://www.treasury.gov/press-center/press-releases/Pages/rr1966.aspx

      He makes no mention of enabling legislation per se, but he spoke with assurance and from that we can infer that he had as deputy secretary the legal authority to issue those securities.

      We can find further inferences that TIPS are authorized by congress in s. 4 of the 14th Amendment (here:
      14th Amendment
      https://en.m.wikipedia.org/wiki/Fourteenth_Amendment_to_the_United_States_Constitution

      Section 4. "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.")

      For U.S. Savings Bonds which are not an debt, but a contract, we see here:

      https://en.m.wikipedia.org/wiki/United_States_Savings_Bonds

      "On February 1, 1935, President Franklin D. Roosevelt signed legislation that allowed the U.S. Department of the Treasury to sell a new type of security, called the savings bond, to encourage saving during the Great Depression. The first Series A savings bond was issued a month later, with a face value of $25. They were marketed as a safe investment that was accessible to everyone. Series B, C, and D bonds followed over the next few years."

      All of the above strongly comports with the sense that U.S. TIPS are a run-of-the-mill debt of the U.S., and that "government equity" is likely not and would have to fit alongside U.S. savings bonds in a special category requiring a specific bill passed by congress to enable the Sec. of The Treasury to issue those contracts.

      To dig out more, would take time and effort well beyond the worth of the illumination that might result.

      Delete
    31. OEE,

      "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.

      Delete
    32. OEE,

      Because 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.

      Delete
    33. For U.S. Savings Bonds which ARE a debt we see here:

      https://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.

      Delete
    34. So, FRestly, I erred w.r.t. savings bonds. Fine, 1 pt to you.

      Congress can legislate anything, provided it fits w/in the four corners of the constitution, as amended. Your scenario of legislating minus 30% inflation on TIIS would likely not fit w/in the four corners of the constitution.

      L. Summers would not have proceeded with TIIS in the absence of solid legal opinion that the issuance was legal; continuation of the issuance of TIIS/TIP notes and bonds would not stand up to scrutiny if it were authorized by congress. Absence of evidence of authorization is not evidence of the absence of authority.

      You will have to support your thesis that "[t]here 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." There's real money riding on the antithesis, not mere sentiment.

      Delete
    35. OEE,

      "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.

      Delete
    36. OEE,

      Your 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.

      Delete
    37. "Your scenario of legislating minus 30% inflation on TIIS would likely not fit w/in the four corners of the constitution."

      Because 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.

      Delete
    38. 《"Your scenario of legislating minus 30% inflation on TIIS would likely not fit w/in the four corners of the constitution."

      《Because 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.》

      None of the above, FRestly, because congress cannot take (expropriate) property without paying due compensation.

      The 14th amendment section 4 prevents congress from revising the terms of debt previously issued.

      That and the prospect of a complete meltdown in financial markets preclude the sort of action that you contemplate congress undertaking.

      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 TIIS if doing so was ultra vires? I'm hard pressed to imagine that TIIS would be issued today if it were not legal to do so.

      From 1996..
      《CITATION] US Treasury inflation-indexed bonds: The design of a new security
      R Roll - The Journal of Fixed Income, 1996 - jfi.pm-research.com
      RICHARD ROLL is the Allstate professor of finance at the Anderson School at the University of California at Los Angeles. n May 1996, the US Treasury announced its intention to issue
      “inflation protection” bonds with cash payments linked to a general price index. It solicited the opinions of interested parties about the form of such a security, and engaged in several months of collective security design. This is surely one of the most interesting episodes in the history of US fixed-income markets, for the Treasury has never before issued an indexed …》

      Delete
    39. FRestly, look into the 103rd and the 104th congresses' records; 1997 (the 105th) is too late. Here is the public announcement 9/26/96:
      https://www.treasurydirect.gov/news/pressroom/pressroom_comnewmk.htm

      Delete
    40. OEE,

      https://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.

      Delete
    41. "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."

      "If." --

      Again, I point to the fact, not the argument, that the market for TIPS, established in 1996-97 has continued up to the present day without 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, roughly a quarter-century ago.

      "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."

      I believe the proposal was for the minting of a $ 1 trillion "coin" of platinum. The latest price for Pt is $1060 per troy oz. ($34,080.-- per kg .999 fine) (mid-range of bid & ask). The $1 trillion coin (in fine Pt) would require 29,342.45 tonnes (metric-tons) of .999 Pt.

      "Between 1975 and 2006, a total of 130,715,000 troy oz platinum were supplied worldwide, which is equivalent to about 4,065,236 kg or 4,065 tonnes."--http://www.platinum.matthey.com/services/market-research/market-data-tables

      So, it was a bit of a joke, that suggestion. In any event, it's time to move onto other things, before we wear out our welcome on "The grumpy economist's" blogsite.

      Delete
    42. OEE,

      "...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?

      Delete
    43. "I believe the proposal was for the minting of a $ 1 trillion coin of platinum."

      Nope, 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."

      Delete
    44. FRestly, re: $1 trillion coin from the U.S. mint.
      If the administration were ever so foolish as to pursue such an object, go long gold and short the dollar.

      The illustration appearing in the wikipedia page cited would have a face value of exactly $0.00. The "$1 T" appearing on the face of the mocked up coin does not designate a notional value of $1,000,000,000,000.00. The mint would have to impress on the coin either "$1,000,000,000,000" or "One Trillion Dollars", or both.

      Nevertheless, it is a fine April Fool's Day jest destined never to see the light of day, a.s.

      Delete
  10. 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.



    Still, 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.



    ReplyDelete
    Replies
    1. Ben,

      "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.

      Delete
    2. Ben,

      Milton 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."

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  11. 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.

    If 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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  12. Social Security Trust Fund -- "The Trust Fund represents a legal obligation of the federal government to program beneficiaries. Under current law, when the program goes into an annual cash deficit, the government has to seek alternate funding beyond the payroll taxes dedicated to the program to cover the shortfall. This reduces the trust fund balance to the extent this occurs. The program deficits are expected to exhaust the fund by 2034. Thereafter, since Social Security is only authorized to pay beneficiaries what it collects in payroll taxes dedicated to the program, program payouts will fall by an estimated 21%." -- Wikipedia, "Social Security Trust Fund"

    Social Security Trust Fund -- "Some in our country think that Social Security is a trust fund – in other words, there's a pile of money being accumulated. That's just simply not true. The money – payroll taxes going into the Social Security are spent. They're spent on benefits and they're spent on government programs. There is no trust." -- Geo. W. Bush, in a press release from the Office of the Press Secretary. February 9, 2005.

    "Some commentators believe that whether the trust fund is a fact or fiction comes down to whether the trust fund contributes to national savings or not." -- Wikipedia, "Social Security Trust Fund", citing: Nataraj, Sita; John B. Shoven (2004). "Has the Unified Budget Undermined the Federal Government Trust Funds". NBER Working Paper No. 10953. doi:10.3386/w10953.

    "The concepts of solvency, sustainability, and budget impact are common in discussions of Social Security, but are not well understood. Currently, the Social Security Board of Trustees projects program cost to rise by 2035 so that taxes will be enough to pay for only 75 percent of scheduled benefits. This increase in cost results from population aging, not because we are living longer, but because birth rates dropped from three to two children per woman. Importantly, this shortfall is basically stable after 2035; adjustments to taxes or benefits that offset the effects of the lower birth rate may restore solvency for the Social Security program on a sustainable basis for the foreseeable future. Finally, as Treasury debt securities (trust fund assets) are redeemed in the future, they will just be replaced with public debt. If trust fund assets are exhausted without reform, benefits will necessarily be lowered with no effect on budget deficits." -- Stephen C. Goss, Chief Actuary of the Social Security Administration, Social Security Bulletin, Vol. 70, No. 3, 2010.

    There, in a nut shell, is the nub of a problem--a federal social program legislated in 1934 (Roosevelt, "32"), that has been amended several times since to expand the program spending and increase the number of beneficiaries--that, despite the opinion of the SSA chief actuary, will 100 years later, in the year 2034, become a budget line item that Congress will grapple with, as the prospect of cutting then-current benefits by some 21% (or, more) looms. Add to this, the current year's spending programs (upwards of $3.5 trillion additional to the $3.6 trillion authorized in 2020) and the national debt will likely become a serious impediment to continued economic growth going forward.

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  13. oooorrr.... 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.

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