Wednesday, April 11, 2012

beowulf on using consols to avoid the debt ceiling

Consols could be issued under Tsy’s existing bond authority (“The Secretary may issue bonds authorized by this section to the public and to Government accounts at any annual interest rate” 31 USC 3102) since unlike bills and notes, bonds have no time restrictions on maturity. In 3121, “the Secretary of the Treasury may prescribe… (5) the dates for paying principal and interest”. The permissive “may” instead of the mandatory “shall” means that the Secretary doesn’t actually have to ever set a date for paying principal.

Now here’s where the magic happens, as the TreasuryDirect website says, “When a Treasury bond matures, you are paid its face value”. A bond’s face value (synonymous with “par value” or “face amount”) is the principal Tsy promises to repay. When a bond is stripped, the face value is what the zero coupon is entitled to while the bond coupons go to the interest-only strip.

Now look at the debt ceiling statute, “The 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 (except guaranteed obligations held by the Secretary of the Treasury) may not be more than…” (31 USC 3101). Consols are exempt from the debt ceiling because the obligation has no face amount of guaranteed principal to repay.
Read it at Modern Monetary Realism
beowulf comment

Ramanan:
I am slightly unsure of the consol thing because 31-USC-3101 says:
” For purposes of this section, the face amount, for any month, of any obligation issued on a discount basis that is not redeemable before maturity at the option of the holder of the obligation is an amount equal to the sum of—(1) the original issue price of the obligation, plus … “
beowulf:
Treasuries can be issued as interest-bearing (as T-bonds are) or on a discount basis (T-bills), the discount is sort of like the interest paid up front. The only payout is the guaranteed principal on the back end. A consol is a perpetual annuity, its interest-bearing but there is no back end.
Think of a consol as a constructively stripped bond with :(a) the Secretary keeping the face amount of the zero coupon principal, 3101 says Tsy-held “guaranteed obligations” don’t count against debt limit; and

(b) a separate interest-only annuity that can be (per bond statute, 3102), “sold to the public and to Government accounts at any annual interest rate”. Since there’s no maturity date at which time principal is guaranteed to be repaid, it doesn’t count against the debt limit either.

11 comments:

Jonf said...

Oh wow! Really? And we still have a debt limit problem?

Jonf said...

Beowulf should have another 340,000 google hits for this idea. Brilliant.

Matt Franko said...

This also:

"sold to the public and to Government accounts at any annual interest rate"

Since Treasury can sell these things to the public AND Govenment accounts, that means THE FED CAN BUY THEM from Treasury with RBs....

Checkmate! (except for morons).

Resp.

Ryan Harris said...

Another ingenious work around for the poorly designed US Code.

We shouldn't have to work around our system of laws though. If the democracy is to work, the politicians need to understand how the economy, budget and monetary system work together. The Congressional Budget Office has the official job of educating the politicians but it is staffed by the Harvard neo-classicals with narrow academic backgrounds who don't understand how the monetary and banking systems fit in with government. Subscribe to the RSS for their reports to congress, I guarantee it will make you mental to read the reports they give to congress on a daily basis.

Ryan Harris said...

Tell your politicians to replace the radical neo-liberal economists at the CBO with MMT economists.

beowulf said...

This is easy because the code section is simple enough to keep straight in your head. Look at something really complicated like the tax code, you can see how tax lawyers and accountants make a fortune taking advantage of imprecise language to find tax loopholes that Congress never intended or even imagined.

The most famous of these is the 401(k). Don't you think if politicians thought of it they'd use a catchier name? It was a benefit consultant named Ted Benna who got the ball rolling.
http://money.msn.com/saving-money-tips/post.aspx?post=eb9632ff-1d35-44ad-bf77-349f8492a081

Anyway The only reason that people much smarter than me like Benna haven't hacked the debt and coinage sections of the USC Code like this is because, ironically, there's no money in it. :o)

Having said all that, I mentioned consols just to cover all the base. I really think jumbo coins are far easier to explain and have the political advantage of actually paying down the public debt.

beowulf said...

"Since Treasury can sell these things to the public AND Government accounts, that means THE FED CAN BUY THEM from Treasury with RBs...."

Matt the Federal Reserve Act pushes Fed purchases of Treasuries to secondary market. Doesn't make a difference really, the Fed can tell the primary dealers at what price it will buy unlimited quantities of T-bonds, and its the same as fixing a price for direct purchases from Tsy.

Letsgetitdone said...

So Beo, why can't the revenue from consols used to pay down the debt subject to the limit again?

Btw, my new post here: http://www.correntewire.com/avoiding_a_debt_ceiling_election_sellout
after quoting and referencing you says:

"So, the Treasury could also legally issue consols in amounts substantial enough to avoid breaching the debt ceiling before the election, and also to avoid the threat of a Government shutdown with its accompanying political fallout. My hunch is that the President will probably either just play the balancing game, or at most issue consols to put off a day of reckoning.

I don't think he'll either use the 14th amendment challenge or any of the PPCS options, because he will view them all as too disruptive to the status quo of financial sector control over the economic and political systems, especially the PPCS options which rip the mask off his oft- stated but false view that the Federal Government can only raise revenue by either taxing or borrowing.

Using consols also reveals that the "either taxing or borrowing" meme is wrong. But the idea of consols is more resistant to easy widespread public understanding than the idea of a Trillion dollar platinum coin. And it also still looks like it's about borrowing, so it doesn't flatly contradict the "taxing or borrowing" myth. So, of course, given the President's evident dislike for dispelling right-wing myths, if push comes to shove, this is likely to be the Administration's preferred tactic."

Jonf said...

I really like the idea of consols, perpetual bonds. Beo has done it again. I like this better than the 14th or the coins, but that's just my preference. Still I doubt Obama will use it - unfortunately. My bet is he will just "negotiate" around the ceiling again. But if he is going to use it, now would be a good time.

Tom Hickey said...

The president and his team are not out of the box thinkers.

Jonf said...

Out of the box thinkers, they are not. Heck, it would be nice if they could just think. But wait, if we can arrange some bi partisan agreement on the thinking project.....