I’m not sure you understand how bond pricing works. There are Treasury bonds in the market right now with very high or very low coupon rates, that sell for more or less than par. If the Treasury decided to issue bonds with a 10% rate, the market would just pay more than the face amount for them, just like a bond already in the market with that coupon would be worth more than the face amount.
It would have no effect on inflation expectations.
Of course there is.
The very raison d’être of this premium bond issue is to maintain elevated public sector spending ie fuel inflation.
Paying $130 for a $100 bond to earn $10 interest (giving the holder a yield of 7.7%) might be the best deal going round. But if the bondholders see inflation breaking out maybe they might only stump up say $95 because then the 10.5% yield counters the inflation losses.
The $100 bond is only sticker price. The bondholders determine the market price.
Yes, of course. And, if treasury bonds are yielding 5% now, then bonds in the market that have a 1% coupon are priced well below 100, those with a 10% coupon are priced well above 100. I’m not sure what your point is.
The treasury will issue more debt for sure, so whatever inflation implications that has are the same whether they do it through new premium bonds or by ignoring the debt limit. The mechanism for issuing additional debt shouldn’t change the inflation expectations.
Paul Krugman is pretty good about explaining these things in plain English.
Doing Whatever It Takes on the Debt
I take that opinion on note, but do you consider that “clearly argued and rational” will apply when the debt bucket hits the fan?
Are you talking about the US issuing too much debt, or the US defaulting? Because in terms of too much debt, Japan has a debt/GDP ratio of 261%, where the US is at 122%. I would think Japan is well ahead in the bucket/fan department.
If you’re talking about defaulting, yes, that’s what this thread is about. That would certainly cause many buckets to hit many fans. I don’t think I’ve seen your preferred way of moving forward, but I may have missed it.
I think a key question is not which alternative should be tried, but in what order. But I’ll get to that.
This is a question I’ve been asking off and on since it became clear that we were headed towards this sort of moment: who the devil would have standing to sue? Who could claim injury??
I think it’s clear that the House of Representatives would have standing to sue the 14th Amendment solution because the debt ceiling law would be violated. IMHO, the 14th Amendment should be the correct solution anyway. In a saner world, SCOTUS at least would tell Kevin & Co. to pound sand, because the Constitution trumps any law. The problem is, we’re not in that world. I could see this SCOTUS upholding the debt ceiling law and requiring the Administration to obey it. I wish I didn’t have to be scared of this possibility, but I am.
The premium bonds, or consols even (consols are bonds with no redemption date and consequently would have the very nice face value of $0.00), but they promise to pay interest at a given rate in perpetuity) would be basically impossible to challenge AFAICT.
I have two concerns about them. One is logistical: you’d need to sell a lot of them in a hurry as the debt limit approached, in order to give some breathing room between our nominal debt and the debt limit. And then you’d need to keep selling enough of them on an ongoing basis to keep us from hitting the debt limit.
Not knowing the quantities of bonds that the Treasury sells on an ongoing basis, I have no idea whether this is a substantial problem or a trivial problem. I’ve seen no one address it, hence my ignorance.
A second problem is that raising interest rates is what you do to choke off economic growth. And whether it’s the premium bonds or the consols, they’d have to be sold at a higher rate than bonds currently sell for, in order to get the people/institutions who buy Treasury bonds to buy these bonds specifically. If enough of them are sold to successfully get us away from the debt limit, they’d be the default Federal interest rate. So they’d increase the odds of a recession next year or late this year.
Anyhow, getting back to the question of which order to try these things in:
The discharge petition. If that works, it solves the problem by a known and unchallengeable method.
The trillion-dollar platinum coin. Yes, it’s an artificial solution - to an artificial problem. A match made in heaven, AFAIAC.
The other great thing about the coin is that it’s basically a free play. If it’s tried and it fails, we’re no worse off than if it hadn’t been tried. That’s why it should be tried early in the sequence.
(There are two ways it can fail: (1) the Fed refuses to accept the coin; and (2) it’s challenged in the courts. Hence my interest in standing: I just don’t see who would have it. It breaks no law, it does no harm.)
The Fourteenth Amendment. If SCOTUS agrees that it trumps the debt ceiling law, we’re good. If not, that would be a very damaging decision, but at least everyone in America can see that even the current SCOTUS is willing to destroy the economy.
But have those consols ready to go if all else fails.
ETA: I agree that the coin is not inherently inflationary. It would be inflationary if the Federal government spent more than it would have, absent this whole debt ceiling fiasco, on account of that extra $1T in its account at the Fed. That would inject up to $1T of fiat money into the economy which would cause inflation. But this Administration would have no plans to spend more on account of the coin, and actually it probably couldn’t; it’s constrained in what it can spend by the spending bills that Congress has passed. All the coin would do is allow the Administration to continue spending the money that Congress has authorized it to spend.
Thank you for the very comprehensive and well-thought out response!
I want to correct one thing you have wrong in your post – if the US issues bonds with a 10% coupon, that doesn’t raise interest rates. They would sell those bonds at a premium, so that the yield would still be whatever the market yield is for 30-year bonds, around 3.75% I think.
Market yields are determined by some combination of what the market thinks the Fed will do, how the economy will do, and probably other factors, but I don’t think one of them is the coupon rate of bonds. There are bonds out there with a coupon of 7.5% and with a coupon of 1% already. They are just priced above and below $100 as necessary to get back to the current market yield.
In this article, Laurence Tribe argues that the president should ignore the debt ceiling (gift link):
My read is that congress has passed conflicting laws – spending and taxation laws, and the debt ceiling law. If congress doesn’t act to raise the debt ceiling, the president will have to violate one of those – that’s just math. Set spending and taxes at a certain level and you imply the debt.
So, rather than follow the debt ceiling law (and default on the debt, which would be catastrophic), he’s saying to follow the spending and taxation laws. One of those has to give, and it’s better for the country (and, really, the world) if the US doesn’t default.
Then why would anyone buy these bonds rather than the regular 30-year bonds, if their actual yield would be the same? Just to be patriotic?
The trouble is, you’re dealing with a small group who have the common sense and knowledge of monetary policy of a sovereign citizen at a traffic stop. They don’t understand basic fundamentals, and think they can utter magic words to get what they want.
They will get utterly confused when bad things happen as a result of their own stupidity.
That’s what the Treasury Department would be issuing. Lots of investors have to own some amount of treasury bonds, and they are maturing all the time, so there is a constant supply of new bonds.
The idea is that the face value of the bonds is much less than what the government is getting from the issuance. Let’s say the fed had a debt limit of $100 but needed $150 in order to pay for all the goods and services that Congress has mandated. Instead of issuing $150 par value (which would violate the limit), they issue $100 par value with a coupon high enough so that it brings in $150 at current market yields.
In today’s 30 year yield environment of about 3.75%, if they issued a $100 face value bond with a coupon of 7%, they could sell it for $157. The face value is only $100, so they are within the limit, but they’ve raised an additional $57.
Leaving aside tax and duration questions for a minute, an investor should be roughly indifferent between paying $100 for a 3.75% coupon bond or $157 for a 7% coupon bond. It’s possible that it’s a little tax inefficient or has a different duration, so maybe they raise $155 or $159. That is, there may be some friction costs with such a plan, but those pale in comparison with the friction costs associated with default.
The President should ignore the debt limit. It’s not even a matter of following the Constitution: It’s even more fundamental than that. No legislature anywhere, under any constitution, has the power to ignore the rules of arithmetic. Congress sets income, and congress sets spending, and the difference between those is debt. Congress can’t just say “no it’s not”.
I think I understand now. Thanks for the explanation!
Always happy when it’s my own ignorance that’s being successfully fought.
The question is “What would the Supreme Court rule if he did that?”
On the one hand, they’re partisan jerks who’d love to side with the GOP and bust Biden’s balls, but on the other hand, it’s pretty clear that he’s constitutionally required to authorize paying the country’s debts and, besides, even the biggest partisan jerk doesn’t want the whole U.S. (and planet earth) economy to go into the toilet, if only for the sake of their own portfolios.
I predict if Biden ignored it, the SC would decline to hear the case (assuming Congress has the standing to sue him) on the grounds that it’s a political matter that the Congress and the POTUS need to work out between themselves.
The GOP could probably live with that. They’d get to campaign against this law-breaking president with fascist tendencies violating the will of the Congress blablabla.
The other question is who’s going to buy these bonds when their legality is an open question.
This right here!
I think if Congress puts Biden in the position where he has to violate a law, it’s better to violate the law that doesn’t force a default. And he would have the 14th Amendment as justification.
My hope is for the Discharge Petition to somehow make it through the House of Representatives. But we’ll need 5 Republicans to break off and join us, which I don’t think will happen.
So, my vote is for Biden to break the law that doesn’t cause a default. Ignore the Debt Ceiling, and keep operating as normal.
Krugman wrote a blog piece that describes the coin and premium bond ideas way better than I could. Gift link:
(This thread is going to make me use up all my gift links)
He favors the premium bond idea, and Tribe favors the “ignore the law” idea. Unsurprising that an economist would look for finance solutions and a lawyer would favor legal solutions, I guess. Seems like no one expects the discharge petition to work.
After his almost pointless meetings with the various Congressional leaders, it sounds like Biden’s preferred path (assuming no agreement) is the 14th Amendment way, just ignore the ceiling. I guess he’s more of a Tribe reader than a Krugman one.
Why couldn’t they issue above the limit right now, then? Give that action some time to get through the courts before the hard limit in early June?