John Cochrane — A New Structure for U. S. Federal Debt

A New Structure for U. S. Federal Debt

A new paper by that title, here. 

I propose a new structure for U. S. Federal debt. All debt should be perpetual, paying coupons forever with no principal payment. The debt should be composed of the following:  

• Fixed-value, floating-rate debt: Short-term debt has a fixed value of $1.00, and pays a floating rate. It is electronically transferable, and sold in arbitrary denominations. Such debt looks to an investor like a money-market fund, or reserves at the Fed.
• Nominal perpetuities: This debt pays a coupon of $1 per bond, forever.
• Indexed perpetuities: This debt pays a coupon of $1 times the current consumer price index (CPI).
• Tax free: Debt should be sold in a version that is free of all income, estate, capital gains, and other taxes. Ideally, all debt should be tax free.
• Variable coupon: Some if not all long-term debt should allow the government to vary the coupon rate without triggering legal default.
• Swaps: The Treasury should manage the maturity structure of the debt, and the interest rate and inflation exposure of the Federal budget, by transacting in simple swaps among these securities. 

Of these, I think the first is the most important. Think of it as Treasury Electronic Money, or reserves for all. Why?....

Consols.
 

The Grumpy Economist

A New Structure for U. S. Federal Debt
John Cochrane | professor at the University of Chicago Booth School of Business, a Senior Fellow of the Hoover Institution, and an adjunct scholar of the Cato Institute

Coming from the University of Chicago Booth School of Business, a Senior Fellow of the Hoover Institution, and an adjunct scholar of the Cato Institute, one would expect a proposal for tax-free rent to subsidize the financially ailing rentiers.

Chris Cook — Greece–A Varoufakis Conversion

This proposal is for a conversion of the existing dated 'debt' liabilities into a modern form of the undated credit instruments ('stock') which pre-date modern banking by hundreds, if not thousands of years. 

The Proposal 

Firstly, Greece would dedicate an agreed proportion of tax income to long term funding. Let us say 5% of Greek tax income and an initial allocation of €12bn.
Greece then issues stock (undated credit instruments) at a discount, each of which is returnable in payment for €1.00 of Greece's taxes. This new issuance would then be allocated between the different creditors in a way reflecting the repayment date and interest rate of Greek liabilities. 

From then on Greece would use 5% of its tax income to buy back this stock for cancellation, and the faster the growth of Greek GDP and taxation, the faster would be the rate of return of the stock.

Pieria

Greece – A Varoufakis Conversion

Chris Cook

Andrew Lainton — Varoufakis’s Jane Austen Solution to Escaping Austerity and Achieving Growth

Explaining the Varoufakis strategy — consols. Chris Cook has been big on consols.

Decisions, Decisions, Decisions
Varoufakis’s Jane Austen Solution to Escaping Austerity and Achieving Growth
Andrew Lainton

James Leitner and Ian Shapiro — How to avert another debt-ceiling crisis

Consols. Like Chris Cook has been saying.

The Washington Post
How to avert another debt-ceiling crisis
James Leitner, president of Falcon Management based in Wyckoff, N.J., and Ian Shapiro is a professor of political science at Yale
(h/t Stephanie Kelton on FB)

beowulf — Cicadas are back and so is the debt ceilin

Legal issues pertaining to H.R. 807 the Full Faith and Credit Act just passed by the GOP-dominated US House of Representatives.

Monetary Realism
Cicadas are back and so is the debt ceiling

beowulf

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.