tag:blogger.com,1999:blog-582368152716771238.post6636407124677233071..comments2024-03-29T07:18:14.271-05:00Comments on The Grumpy Economist: A New Structure for U. S. Federal DebtJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger66125tag:blogger.com,1999:blog-582368152716771238.post-1087865088375094512015-04-09T11:40:25.430-05:002015-04-09T11:40:25.430-05:00Squeeky,
Currently, the debt ceiling in the U. S....Squeeky,<br /><br />Currently, the debt ceiling in the U. S. is in place to assure that proper consideration is given to the ability of the government to make the interest payments from tax revenue. The coupon payments on perpetuals would still be made from tax revenue, and so perpetuals would still be considered when adjusting the debt ceiling.<br /><br />The method around this is to declare interest expense on the public debt as a Congressional appropriation in and of itself. Congress could then raise, lower, suspend / reinstitute the amount of tax revenue (as a % of available) used to service the debt.<br /><br />This "solution" has it's own problems in that the central bank may want to lend at a higher interest rate than what Congress wants to pay on it's debt. And so the ability of a government to sell additional perpetual bond issues comes into question.<br /><br />Finally, if the securities are indeed perpetual (government is legally precluded from buying them back), then a government could conceivably box itself in. Depending on the prevailing economic conditions, it can sometimes be less expensive (in the long run) to buy bonds back rather than to continue making payments on them. <br /><br />Perpetual securities prevent this from happening.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-63619746427793730732015-04-09T04:24:19.541-05:002015-04-09T04:24:19.541-05:00Only debt with a specific maturity date counts tow...Only debt with a specific maturity date counts towards the debt ceiling. Thus perpetuals have the added benefit that they do not count towards the debt ceiling (just like Fed reserves). Squeeky Wheelhttp://seekingalpha.com/author/squeeky-wheelnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-5237805972198531632015-03-31T10:27:25.131-05:002015-03-31T10:27:25.131-05:00Prof. Cochrane should tell us how his proposal wou...Prof. Cochrane should tell us how his proposal would have helped Greece. The citizens voted in a government that intended to adjust the coupons, and the international lenders threatened to crash the Greek banking system by denying access to liquidity. Is there a breakthrough idea in the Cochrane paper? I don't see it.Anwerhttps://www.blogger.com/profile/08277173974258559733noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-40742305017864429802015-03-31T08:16:18.376-05:002015-03-31T08:16:18.376-05:00Anwer,
I don't disagree with you, but I think...Anwer,<br /><br />I don't disagree with you, but I think voting rights are the key. With stocks that pay dividends, if you don't like the dividend policy you can vote the board of directors out at the next shareholder meeting. If you are an international holder of government floating rate debt, you have little recourse if the government suspends it's coupon.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-4030971466529462852015-03-30T23:22:12.080-05:002015-03-30T23:22:12.080-05:00You are all barking up the wrong tree. The push fo...You are all barking up the wrong tree. The push for immigration and the opposition to it, are about politics, not economics. <br /><br />Die Lösung<br />(The Solution)<br />Bertolt Brecht<br /><br />After the uprising of the 17th June<br />The Secretary of the Writer's Union<br />Had leaflets distributed in the Stalinallee<br />Stating that the people<br />Had forfeited the confidence of the government<br />And could win it back only<br />By redoubled efforts. <br />Would it not be easier<br />In that case for the government<br />To dissolve the people<br />And elect another?Fat Manhttps://www.blogger.com/profile/09554029467445000453noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-83926480655530084542015-03-30T22:47:20.582-05:002015-03-30T22:47:20.582-05:00No, not after reading the section on variable coup...No, not after reading the section on variable coupons in his paper. I think he is missing the reason why companies vary their dividends freely, and why that practice would not translate very well to government debt. If I'm holding stock, then I don't need a dividend payment, because that value is still contained in the share price. If they do pay out a dollar dividend, the share price goes down by about a dollar. Either way, I don't lose or gain much by variation in dividend payments. But if a government skips an interest payment, that is a pure loss for me, and I don't want to give them too much freedom to do that.<br /><br />And you are on point about international holdings of government debt. Perhaps Prof. Cochrane is relying heavily on the representative agent typical of many of his models. In political questions we really do need to consider that votes are distributed much differently than wealth, and many people would be quite happy to soak the rich and foreigners by skipping coupons for so-called emergency reasons.Anwerhttps://www.blogger.com/profile/08277173974258559733noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-29230664564716814252015-03-30T19:49:42.767-05:002015-03-30T19:49:42.767-05:00Anwer,
Still want to buy want John wants the fede...Anwer,<br /><br />Still want to buy want John wants the federal government to sell? I read through John's entire proposal and one notable phrase that was missing from it was:<br /><br />"And I, John Cochrane, would be a buyer"<br /><br />Also of note, variable coupon lenders are not necessarily U. S. voters and U. S. voters are not necessarily variable couple lenders. I don't think John addresses how the interests of international holders are handled when they may not have a voting voice.<br /><br />One other thing. John recommends using the suspension of dividends as a "War time emergency" procedure. Any chance that suspending dividends to help fund a war changes the number of your enemies from 1 to 2 or 3?<br /><br />Americans may feel some civic duty in sacrificing for the good of the country - doing more with less. Wanna bet that civic pride stops at the border?FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-5569611346791208742015-03-30T08:37:19.727-05:002015-03-30T08:37:19.727-05:00John,
"I think this discussion -- and much d...John,<br /><br />"I think this discussion -- and much discussion surrounding GDP linked debt-- is a bit off track."<br /><br />Okay, would tax receipt linked debt be more in line with this discussion? There is no guarantee that total tax receipts will rise and fall commensurately with GDP or that GDP is adequately measured - fair enough. So instead government stipulates that it will limit the payments on it's securities to a fixed fraction of it's available tax revenue.<br /><br />In an extreme fiscal circumstance (code words for anytime tax revenue is less than expenditures), the existing stock of government securities is increased and "dividend" payments are diluted down. The same fixed percentage of available tax revenue is split among more "shares".FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-73222094278979262502015-03-30T01:38:59.244-05:002015-03-30T01:38:59.244-05:00Companies don't use rules for dividend payment...Companies don't use rules for dividend payments because profits accumulate and will be paid out to shareholders eventually, with (non-cumulative) preferred shareholders having priority with the accumulated assets in cases of distress. The timing of payments doesn't matter a great deal because these are residuals being distributed. <br /><br />Government distributes residuals by spending on citizens, not by paying variable coupons. You suggest that variable-coupon lenders will have their interests represented by voters, who will fight for the resumption of coupon payments. Really? Is that because they would rather have the government make optional debt payments than just spend that money on them? Do you feel that you have been sufficiently persuasive?Anwerhttps://www.blogger.com/profile/08277173974258559733noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-32111994640646574862015-03-30T00:50:29.863-05:002015-03-30T00:50:29.863-05:00John,
"I view variable coupon debt as someth...John,<br /><br />"I view variable coupon debt as something much deeper, a structure for governments in extreme fiscal circumstances where choices get much harder."<br /><br />"Facing wars, financial panics, sovereign debt crises, etc. No rule you can write down ahead of time is going to be that useful for this sort of thing."<br /><br />Please define what you mean by an extreme fiscal circumstance. It seems that term could have been applied at least once per decade for the last 100 plus years. Can you name the last decade in the U. S. when there wasn't either a war going on, a financial panic of some type, or just any old recession?<br /><br />I view variable coupon debt as a sucker bet so that government can "respond" to some "crisis" that they deem worthy, nothing more.<br /><br />You talk about a government "restoring" coupon payments once the "exigency" is over as if a government stays content by solving the latest problem without looking for the next one. Do you have a historical example where this has actually happened (consols or otherwise)?<br /><br />Would it not be better for a government to come out and say, we are going to spend 20% (pick a number) of available tax revenue on security payments, no more, no less.<br /><br />War / no war, recession / boom, financial panic / financial lull, how is a fixed percentage of available tax revenue a significant burden on a government's ability to do business?FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-39796889811440573892015-03-30T00:03:21.072-05:002015-03-30T00:03:21.072-05:00Anwer,
"what would happen if we shift the di...Anwer,<br /><br />"what would happen if we shift the distribution of wealth in their favour as the economy heats up, and away from them in downturns"<br /><br />I don't seem to recall Shiller recommending a negative coupon for GDP linked securities during economic downturns. And so the shifting of wealth away from holders of financial assets during economic downturns does not appear to be included in Shiller's securities.<br /><br />Not to say this is a bad thing. Pro-cyclical government policy during downturns tends to be both economic and political poison.<br /><br />"I think the best way to determine the effect of that on the economy is to consider who holds financial assets..."<br /><br />I disagree. I think the best way to determine the effect of that on the economy is to consider the incentives placed on holders of those financial assets irrespective of how wealthy / poor the buyer is. If government is willing to pay a rate of return for no effort, then the economic results will reflect that - a nation of coupon clipping couch potatoes. If government instead pays a rate of return for hours / years worked (for instance social security payments), then it gets a more productive society.<br /><br />That is the tricky thing about government insurance. It should stabilize growth, but should not promote apathy / indifference.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-62855608857640844812015-03-29T23:44:52.972-05:002015-03-29T23:44:52.972-05:00I think this discussion -- and much discussion sur...I think this discussion -- and much discussion surrounding GDP linked debt-- is a bit off track. One motivation for GDP linked debt is to encourage an automatic procyclical fiscal policy, on stimulus grounds. That is not something a government couldn't simply choose to do on its own, which isn't that exiting at least to me. <br /><br />I view variable coupon debt as something much deeper, a structure for governments in extreme fiscal circumstances where choices get much harder. Facing wars, financial panics, sovereign debt crises, etc. No rule you can write down ahead of time is going to be that useful for this sort of thing. That's why companies don't write down a rule by which dividends are tied to quarterly earnings. <br /><br />GDP linked debt is also advocated ex post for a country like Greece. But here the moral hazards both of doing the structural reform to get GDP growing, and to report GDP correctly, seem pretty high. <br /><br />Discretion + reputation and rules each have advantages. <br /><br />Modestly, I might point out the paper has a long section on all this which might inform the discussion a little bit. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-57632599722819120692015-03-29T23:26:01.112-05:002015-03-29T23:26:01.112-05:00I was wondering what you meant by pro-cyclical, an...I was wondering what you meant by pro-cyclical, and it's good that you clarified that. Yes, the coupon payments do rise as growth rises. I think the best way to determine the effect of that on the economy is to consider who holds financial assets, and what would happen if we shift the distribution of wealth in their favour as the economy heats up, and away from them in downturns. In other words: is it optimal for wealthy people to insure the economy? If the answer is not self-evident, then I recommend some reflection on the work of Amir Sufi and Atif Mian. Remember, they also propose innovation in debt contracts of the kind that we are discussing here.Anwerhttps://www.blogger.com/profile/08277173974258559733noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-47154871338098155342015-03-29T23:23:56.447-05:002015-03-29T23:23:56.447-05:00Countercyclical policy by the federal government w...Countercyclical policy by the federal government would be output gap linked securities. Government expenditures (in the form of coupons) rise and fall with the output gap.<br /><br />My store owner then hedges his exposure to GDP fluctuations by buying output gap securities from the government. As GDP falls below trend (store sales suffer), he receives increased coupon payments from the government.<br /><br />This is insurance 101 - something the government is well suited to provide.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-19374420476418894622015-03-29T23:07:35.853-05:002015-03-29T23:07:35.853-05:00Shiller's GDP linked securities could also be ...Shiller's GDP linked securities could also be considered countercyclical if the central bank is the only buyer. In that case, tax revenue dedicated to payments on GDP linked securities would be a liquidity reduction method - higher payments send more money back to the central bank.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-30527792926354706562015-03-29T23:04:18.534-05:002015-03-29T23:04:18.534-05:00Anwer,
Yes the government is reducing it's ex...Anwer,<br /><br />Yes the government is reducing it's exposure to macroeconomic risk, but that must also mean that buyers are increasing their exposure to macroeconomic risk - hence they are pro-cyclical.<br /><br />Suppose I own a store whose fortunes rise and fall with the rate of GDP growth. I then take my profits and invest them in GDP contracts sold by the federal government. Has my risk exposure to GDP increased or decreased? <br /><br />"They are counter-cyclical because the government is selling them, not buying them."<br /><br />No. If you read Shiller's proposal, GDP linked securities make coupon payments that are linked to the GDP growth rate (also John recommends coupon payments with his perpetual securities). These coupon payments (government expenditures) rise and fall with the GDP growth rate and so they are pro-cyclical. If Shiller had instead said that these securities would accrue returns at the GDP growth rate, you can make an argument that sales by the government reduce overall liquidity. The coupon payments restore that liquidity.<br /><br />And so suppose that the economy is running too hot, should government increase expenditures or reduce them? With GDP linked futures, government expenditures in the form of coupon payments rise with higher growth, when they should fall.<br /><br />It's similar to the argument whether higher nominal interest rates reduce or increase the inflation rate. Suppose the GDP growth rate is 100%. GDP linked contracts pay an annual coupon rate of return of 100%. Where is the reduction in liquidity (countercyclical policy) if the government is selling a trillion dollars worth of contracts and then making a trillion dollars worth of coupon payments in the same year?FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-66503863447351786202015-03-29T20:48:11.365-05:002015-03-29T20:48:11.365-05:00They are counter-cyclical because the government i...They are counter-cyclical because the government is selling them, not buying them. In other words, the government is reducing its exposure to macroeconomic risk, and stabilizing its finances. This is the argument that Shiller uses to advocate for them.Anwerhttps://www.blogger.com/profile/08277173974258559733noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-61829999392413026792015-03-29T18:19:14.818-05:002015-03-29T18:19:14.818-05:00Anwer,
"If the goal is to reduce the cost of...Anwer,<br /><br />"If the goal is to reduce the cost of government borrowing..."<br /><br />I disagree that a government should try to "reduce the cost of it's borrowing". Rather, a government should try to match it's realized cost of financing with the performance of the economy. That is what Shiller's GDP linked contracts are all about. If GDP is growing like gang busters, then Shiller's GDP will end up costing the government more on an absolute basis than if GDP growth was negligible.<br /><br />The problem comes down to getting the realized cost of financing to match economic performance while allowing government to act in a counter cyclical fashion to promote growth.<br /><br />Risky assets are the key, but John introduces non-linear, discretionary risk to the holders of government securities when linear, non-discretionary risk is better suited to the task.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-83769861854815512802015-03-29T18:08:43.610-05:002015-03-29T18:08:43.610-05:00Anwer,
The problem (as I see it) with Shiller'...Anwer,<br /><br />The problem (as I see it) with Shiller's GDP linked contracts is that they are pro cyclical - return on GDP linked securities rises during booms and falls during recessions.<br /><br />And so while I agree that linear contracts are the way to go, I would insist that as a macroeconomic stabilization tool they should be counter cyclical.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-51718653912494066702015-03-29T14:40:15.356-05:002015-03-29T14:40:15.356-05:00Yes I also have that same concern about optional c...Yes I also have that same concern about optional coupon payments. If the goal is to reduce the cost of government borrowing, then the government should not also be buying the option to skip payments. What Prof. Cochrane wants with this option is stabilization, and a better way to get that is by linear contracts such as those proposed by Shiller, or linear monetary rules advocated by John Taylor. The government would still have plenty of real options in a crisis, without needing to buy them from lenders.Anwerhttps://www.blogger.com/profile/08277173974258559733noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-2414876278676761782015-03-29T13:27:43.127-05:002015-03-29T13:27:43.127-05:00I don't have the criticisms that Anat has as l...I don't have the criticisms that Anat has as long as the CoCos eliminate / reduce the need for government intervention. The problem comes about when government (responsible for macro-economic stability) becomes a destabilizing economic force either through pro cyclical economic measures or through ad hoc discretionary measures. <br /><br />I agree, government macro policy should be rules based, and it should be countercyclical. The problem with John's argument is that he leaves government to define an "exigency" after the fact. Cut the coupon, then devise a reason. That leads to politically motivated changes in coupon payments rather than countercyclical, rules based changes.<br /><br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-3281259750614299562015-03-28T13:12:45.370-05:002015-03-28T13:12:45.370-05:00Thank you, Prof. Cochrane, all. It's a very el...Thank you, Prof. Cochrane, all. It's a very elegant solution, but what happens to risk? For symmetry, it should be identical with risk in a model where numeraire is date-stamped money (becoming worthless after that date), non-interest bearing but also legal tender. Greece, and the city of Chicago (neither is issuing money or influencing its price level / exchange rate), swap contracts are being terminated because risk has increased: http://www.reuters.com/article/2015/03/04/usa-chicago-swaps-idUSL1N0W52W520150304<br /><br />Essentially my question is whether debt and money really are indistinguishable over time. Thank you again.Ecoute Sauvagehttps://www.blogger.com/profile/16322296385474846302noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-17219202170411268432015-03-28T12:07:08.080-05:002015-03-28T12:07:08.080-05:00Debt using Option 1 is your choice for "most ...Debt using Option 1 is your choice for "most important". Of course, this 'debt' sounds almost as if it were 'money' (it is 'reserves'). <i> but are we really talking about DEBT here? </i><br /><br />I think not and here is why I think this:<br /><br />A bank loan is a great example of an apparent increase in the supply of Option 1 'debt'. The bank borrower signs a note or bond which is equal in value to the size of deposit increase given to the borrower. <i> This event causes a macro-economic increase in measured wealth that is the sum of the size of the note or bond plus the size of the deposit, or two times the size of the deposit credited to the borrower. The wealth of the macro-economy has increased by twice the size of either the note or the deposit. </i><br /><br />In a bank loan situation, no one thinks of the deposit as debt. It is a certificate of wealth that is expected to be freely transferred. On the other hand, the note or bond (now owned by the bank) is wealth because it represents an obligation (a debt) upon the borrower.<br /><br />A government loan or borrowing is no different except that the obligation (the bond) is considered more secure. The money (reserves) that government acquires is not debt but is identical to the increased deposits (to the governments credit) received by bank borrowers.<br /><br />That explains why I think your Option 1 is not describing 'debt'. Option 1 is describing wealth created by the creation of money.Roger Sparkshttps://www.blogger.com/profile/01734503500078064208noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-85899493632342209312015-03-28T10:45:07.548-05:002015-03-28T10:45:07.548-05:00Thanks for finding that passage, Frank. I don'...Thanks for finding that passage, Frank. I don't know how these administrative changes work, but Anat Admati has strongly criticized CoCos issued by banks because the uncertainty created by such changes or conversions can have a destabilizing effect. That would be especially true if these securities were held in large quantities, by people waiting to see exactly how the government will handle a fiscal crisis. Why is John Cochrane advocating monetary discretion, when we can have rules-based adjustments? Have we entered bizarro world?Anwerhttps://www.blogger.com/profile/08277173974258559733noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-25611822705893808702015-03-27T19:13:15.413-05:002015-03-27T19:13:15.413-05:00Anwer,
Reading through John's paper, here is ...Anwer,<br /><br />Reading through John's paper, here is what he suggests:<br /><br />"Balancing the various incentives, I think that the best structure for government variable-coupon debt resembles noncumulative preferred stock. The usual coupon is $1. The government has the right to suspend or to lower coupon payments, with a statement about the temporary exigency that leads to this decision. When the exigency is over, the government will restore the $1 coupon."<br /><br />John prefers discretionary administrative changes in the coupon (suspensions, reinstatements, and the like which is fine for corporations, not so good for macro economic policy tools). Your proposal makes a little more sense, and would work better if we say that 20% and only 20% of all available tax revenue will be paid out in interest to security holders. Obviously, during recessions, the government would be collecting less in tax revenue and so total payouts would fall (pro cyclical government policy). FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.com