Monetary Realism

Understanding The Modern Monetary System…

The Trillion Dollar Coin and the Debt Ceiling

It appears we’re going to hit the debt ceiling sometime right before the election, according to Mark Zandi and Talking Points Memo:

“There is a risk that the treasury will hit its $16.4 trillion debt limit before the next presidential inauguration,” emails Moody’s chief economist Mark Zandi. “It will be close. I suspect the Treasury will have enough accounting wiggle room to get there, but much depends on whether the economy sticks close to script.”

One plausible scenario, then, is that Congress will have to address the debt ceiling issue in its November-December lame-duck session. But that’s exactly when it’s expected to address huge issues, like the expiring Bush tax cuts and the automatic spending cuts locked in by the last debt limit deal. The outcomes of all those debates will hang heavily on the results of the election — a clean win for Obama portends a much different resolution than an Obama victory in which the GOP takes the Senate, let alone a GOP sweep.”

Somebody pointed out we’re probably hit the debt ceiling right around election time in 2012 – and he did it immediately after the debate last year. This guy must have a crystal ball or something.

Well, last time, that guy waited too long to start talking about the debt ceiling. Not this time.

We need to do something about spending in the U.S….We need to pay off some of our debt by minting one or many trillion dollar coins. We can do it, and its prudent to have less debt in the United States, rather than more.

Fortunately for us at MMR, we happen to have the creator of the Trillion Dollar Coin idea very close by. beowulf is the person responsible for this idea which now has 340,000 entries in Google and it’s very own place in Wikipedia!

Don’t wait until the middle of a presidential election to bring up the idea of getting around the debt ceiling. August is too late. Now is the time to start talking about the Trillion Dollar Coin, reminding people we can do it, and remind important people it exists.

I’ll probably have more about the Trillion Dollar Coin in the next few weeks and months.

(P.S. Please note the Category this post uses. )

(Update: Dunce Cap Aficionado wins the comments thread so far with: “As if this was… all.. somehow…. planned….”)

 

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  • http://www.concertedaction.com/ Ramanan

    Matt,

    There is a misinterpretation of “any” here.

    It’s like saying a bank can fix its term deposits to any rate. Of course it can but it won’t get depositors and other sources of funding need to be used.

    The “any” just means the Treasury secretary can reject bids.

    However, without having a facility to make an overdraft (without changing the law), and faced with the debt ceiling, the Treasury Secretary is forced to issue at the long term yields. (“any” is misleading, at least taken in the wrong sense here).

    Whatever acrobat the Treasury does about selling it to own accounts, finally the debt of the combined entity will be higher than the ceiling in the hypothesised circumstances and hence not possible.

  • Matt Franko

    Ramanan,

    I think Beo perhaps is making a larger point that ‘consuls’ are not bonds, they are a separate entity, so different standard terms apply, we know how important it is to stick with the standard terms ;) . And they are not forbidden by the current law.

    The ‘debt ceiling’ could be looked at as though the govt is just trying to keep track of how much securities they have issued that are redeemable, this in fact would make some sense. With this ‘debt ceiling’ law, the govt rightly reserves the authority to approve the gross amount of ‘redeemable obligations’ if you will, that they issue. This would help them manage these accounts and balances, plan for upcoming redemptions, etc… track the status of gross appropriations, etc.. They do not want to be “blindsided” so they have to keep track of what they are doing so they do a “debt ceiling”.

    Consuls are NEVER REDEEMABLE so there is no concern about having balances in the correct account at redemption time… just need to plan for the payments. Perhaps they would want to start a new “Consul Ceiling” law ;)

    Not that our morons planned it this way though, but a broken clock can be correct 2 times a day…. Resp,

  • Госбанк

    Some postings here reflect I dare say deep misunderstanding on how perpetual bonds(“consols”) are arramged for sale,. as well as show unfamiliarity with the history of consols.

    1. Despite claims that they do not have face value, in fact, they do, such that when they are sold, their face value reflects the hoped for net present value assuming some hypothetical discount factor in perpetuity, say, 3%. Thus, at the moment the consol is sold, the debt position is incremented by the consol face value exactly in the same way as it would be with any other government bond.

    2. Despite the claim that the consol is never “redeemed”, the reality is that consols are issued with an embedded call option which the British Government, for example, exercised on occasion.

    3. On the two occasions the US government issued consols(the 1930 consols and the Panama Canal Loan), they were both redeemable and counted, naturally, as part of the government debt (See http://fraser.stlouisfed.org/docs/historical/ny%20circulars/1935_01514.pdf and http://www.treasurydirect.gov/govt/reports/pd/mspd/1935/opdm011935.pdf).

  • Obsvr-1

    These discussions re: Operation of the FED/UST (call it QE or call it OP Twist, or call it “magic keyboard fingers”) validates the need for MMR and other monetary blogs to educate more and more people.

    If the masses really understood the foundation of our Fiat Federal Reserve System (MMT Operations) and would engage in MMR discussions and education then the scary “Headlines” from the MSM and political theater from the politicians can be understood in context and more importantly addressed with thoughtful, objective counter points. Oh this nation is in dire need to become educated on the most important concepts of the monetary (and other side of the same coin, fiscal) foundation.

  • Obsvr-1

    spot on, and congrats on keeping this site and discussion alive and well.

    If the OWS crowd could understand and rally around MMR then a catalyst for change could be very interesting.

  • http://www.concertedaction.com/ Ramanan

    Matt,

    Consols are obligations and the debt ceiling is defined so that it includes this.

    If the Treasury raises funds worth $20 via consols, the debt increases by $20.

  • beowulf

    The best CEA chairman, Leon Keyserling, was a lawyer.
    http://en.wikipedia.org/wiki/Leon_Keyserling

  • Obsvr-1

    Initially I was against the QE2 (wholesale buying of USTrsy’s by the FED). As I became more educated in the FED/UST operations (MMT) and the overall Federal Reserve Banking system (MMR) I have come to realize that the FED’s QE operations are a blessing in disguise (FED obfuscation). Having the FED purchase US Trsy’s effectively eliminates the interest on the debt and the debt altogether since these Bonds will be cancelled (rolled over) upon maturation. This may be a test run, or slow process of change, that the FED is driving to get to a point of debt-free money.

    I like the TDC better than the consul since the TDC is a non-interest bearing instrument whereas a consul still requires interest payments by the US Gov’t.
    Since there is universal agreement within the MMT/MMR group that the Gov’t spends money into existence and does not need to borrow to spend, then what is the rationale to pay interest on money that is being spent into existence without the need to borrow. Therefore the elimination of issuing US Trsy’s is perfectly rational and the FED (QE) is effectively exercising a tactic of “No US Trys issuance” but obfuscating the process through the use of the new “open and transparent” FED and FED-speak.

    The common argument is that the US Trsy’s are the only tool for exercising monetary policy on the scale of the US GDP. However, we have seen that over the last 4 years FOMC isn’t the only tool the FED uses. If you go back before the Financial crisis and review the FOMC operations and the FED balance sheet then you would see a much different picture of using US Try’s as a monetary policy tool than what we are witnessing today.

    The “Debt Ceiling” is pure political theater, since congress sets the ceiling and congress raises the ceiling (at the 11th hour to save the day !!) after a bunch of political backscratching and spending negotiations (concessions) to continue the “picking of winners and losers” regime. Judge Napolitano correctly identified the problem between the Demo/Repub in that we do not have 2 parties, we have 2 wings of the same party of “Big government spenders”. The Democrats support big government programs, war (MIC) and social programs (Welfare for social safety net) while the Republicans support big government programs, war (MIC) and business (job creator) programs (Welfare for corporations).

    Education for the masses is the key to making significant changes to the existing establishment …

  • beowulf

    Obligations are defined as the total of guaranteed principal only. If guaranteed interest was included in debt ceiling, you’d have to include all future interest payments.
    The would make the public debt clock look like a random number generator as interest rate changes move the total up and down every day. I don’t think recall that ever happening.

  • Obsvr-1

    Even some poisonous species yield edible product ;-)
    e.g. Rhubarb, “fugu” the infamous Japanese for pufferfish …

  • beowulf

    I’m not talking about the financial definition of consols (after all they’re not technically bonds but they could be issued under the T-bond statute), but rather about how Congress defines the public debt (which it does actually in two different ways).

    There’s no question that consols would add to to Public Debt Outstanding. If that’s your argument, you win, consols would certainly add to the total. However, my argument isn’t about that, I’m talking about the subcategory of the above called Public Debt Subject to Limit. That’s why I quoted so much from Title 31 of the US Code to show that Congress sets the debt limit based on the aggregate of guaranteed principal of outstanding Treasury securities. If there’s no guaranteed principal, there’s no debt limit consequences.

  • beowulf

    Also, there’s no question that Tsy would have the option to buy back consols, jus as the UK has the right to buy back its extant consols. Remember the test is is whether the principal is guaranteed by Tsy. If Tsy has a call option, that means it has the discretion but not the obligation to buy back its debt. Doesn’t sound like a guarantee to me, but then what do I know, I’m full of deep misunderstandings.

  • beowulf

    “(c) For purposes of this section, the face amount, for any month, of any obligation issued on a discount basis…”

    “Discount basis” is also mentioned in the section 3121
    “(a) In issuing obligations under sections 3102-3104 of this
    title, the Secretary of the Treasury may prescribe –
    (1) whether an obligation is to be issued on an interest-
    bearing basis, a discount basis, or an interest-bearing and
    discount basis.”

    Since 3121 makes the distinction between interest-bearing basis and discount basis, then the 3101 (c) mention of “discount basis” and not “interest-bearing basis” is an example of the legal principle, the inclusion of one excludes the other.

  • http://www.concertedaction.com/ Ramanan

    Beo,

    31-USC-3101 clearly defines face amount.

    The reason interest payment don’t make an appearance for usual bonds with maturity is that the bond is usually priced to par.

    Interest payments are as much an obligation of the U.S. Treasury as are principal payments.

    The Treasury may define the principal to be zero, but USC doesn’t really use principal as the definition of the face amount.

  • beowulf

    “Interest payments are as much an obligation of the U.S. Treasury as are principal payments. ”

    Right, they’re public debt but they’re not counted towards the debt limit.
    The debt limit looks to face amount of obligations. You’re right that bonds issued on a discount basis (like zero coupons) are partially included under 3101(c), bt adding the original issue amount plus “the portion of the discount on the obligation attributable to periods before the beginning of such month”.

    And what about the portion of the discount attributable to periods AFTER the beginning of such month? They’d be treated the same as future coupons of bonds issued on an interest-bearing basis– not counted under the debt limit.

  • Госбанк

    That’s why I quoted so much from Title 31 of the US Code to show that Congress sets the debt limit based on the aggregate of guaranteed principal of outstanding Treasury securities.

    That is not what the code says. It uses the face value of the security as the debt increment(“The face amount of obligations issued under this chapter”). Nowhere in the code does it say that the principal repayment is a condition for the security to be counted towards the debt ceiling.

    As I wrote earlier, the perpetual bond has a face value which is added to the total debt, upon sale, in the same manner as that of the vanilla bond. One of the documents I referenced clearly states that the 30’s US consols are debt.

    Consider a vanilla 30 year bond discounted at %5 with a %5 coupon. Upon maturity, the principal value in today’s money is only about $250 rather than the face value of $1,000. As someone already wrote, $1,000 in *today’s* money includes all the future discounted cash flows. Therefore, a $1,000 perpetuity with a coupon rate of %5 and discounted at %5 will be equivalent to a vanilla bond, ceteris paribus, hence, will be counted identically against the debt position.

  • Robert Rice

    Do you know where I can find specifics on the Fed rolling over the Treasury principal upon bond maturation? That would be extremely helpful. I’d like a clear definition and elucidation of this process, preferably from the Fed itself.

    Also, I appreciate your other comments, and I wanted to thank you for your kind words and encouragement the other day in another article on QE. It didn’t go unnoticed.

  • beowulf

    You’re describing a bond issued on an “interest-bearing and discount basis”, which is irrelevant to this because 3101(c) , speaks only to including “discount basis” obligations in the debt limit and says nothing about the other two kinds of obligations described in 3121.
    “the Secretary of the Treasury may prescribe –
    (1) whether an obligation is to be issued on an interest-
    bearing basis, a discount basis, or an interest-bearing and
    discount basis.”
    Nowhere in the code does it say that the principal repayment is a condition for the security to be counted towards the debt ceiling.
    Nowhere in the code except for the part where it says “guaranteed principal and interest” you mean.

  • Obsvr-1

    On the UST website there is a Quarterly report that has a lot of data, from that you may be able to calculate what is new debt issuance and what is being rolled over. Since the US Gov’t is currently in a deficit condition, then I guess all of the maturing debt has to be repaid by deficit dollars (rolled over).

    See http://www.treasury.gov/resource-center/data-chart-center/quarterly-refunding/Documents/TBAC%20Discussion%20Charts%20Feb%202012.pdf

    This doesn’t call out bonds maturing on the FED balance sheet and/or whether that debt is rolled over. As a practical matter a bond maturing on the FED BS can just expire and evaporate out of existence, no need to roll over other than to side step the discussion/debate/outrage or enlightenment that the debt just disappeared.

    Perhaps someone has the data or reference to where the roll over is directly presented in a nice chart ?? Is there data or chart on specifically FED held US Trys’s and what happens when the Bonds Mature. Of course in OP Twist the FED is swapping the short term bonds for longer term with a message of pushing down long term rates — perhaps they just want to not talk about, or delay the process for what happens when a bond on the FED BS matures (using the “Time heals all wounds” approach).

    The guys at Zero Hedge post a bunch of UST and FED Bond action, and they post a bunch of data from FRED and other sources. I will have to keep an eye out to see if there is a clear and focused set of data or charts on USTrys roll over funding.

  • http://www.concertedaction.com/ Ramanan

    Of course interest is counted in the debt limit. The reason one doesn’t see it is because the NPV of interest payments and the NPV of the principal add to 100 usually. So one tends to think that interest payments haven’t been added in the sense you mean.

    In the case of consols, the debt is the NPV of the coupon payments and hence if a consol is issued it adds to the debt and the debt subject to limit.

  • http://www.concertedaction.com/ Ramanan

    3101-b talks of the face amount and c defines the face amount.

    Using c, if the Treasury raises $2b in an auction with consols, the debt increases by $2b.

  • beowulf

    “NPV of interest payments and the NPV of the principal add to 100 usually.”

    Exactly, and what’s the NPV of a zero coupon consol? That’s the part of a consol that’s included in the debt limit. :o)

  • http://www.concertedaction.com/ Ramanan

    What’s a zero coupon consol? Nobody will buy the bond. Worthless.

  • beowulf

    No, (c) only refers to one of three kinds of obligations (on a discount basis), it does not include the other two. The debt limit was enacted in 1917, this version of (c) was tacked on in 1989. Prior to that (c) read as follows:
    “The face amount of beneficial interests and participations (except those held by their issuer) issued under section 302(c) of the National Housing Act (12 U.S.C. 1717(c)) from July 1, 1967, through June 30, 1968, and outstanding at any time shall be included in the amount taken into account in deciding whether the face amount requirement of subsection (b) of this section has been exceeded. This subsection does not require a change in the budgetary accounting for beneficial interests and participations.”

    I’m guessing it was as something else prior to 1968.

  • beowulf

    Ah ha! A meeting of the minds! And that’s why consols aren’t added to the debt limit.

  • http://www.concertedaction.com/ Ramanan

    But what’s the use – the Treasury doesn’t get anything to write cheques.

  • Госбанк

    Perpetuity does have a principal. The principal is simply equal to zero due to infinite time discounting, just as a special case of the vanilla bond. That is bond valuation 101. There is nothing special about perpetuity and it is fully within the regulatory framework that adds the face value of the security to the debt position.

    Besides, you keep ignoring the 1935 document I referred to earlier in which perpetuities are explicitly counted as debt.

  • http://www.monetaryrealism.com Michael Sankowski

    But they can issue infinitely many of them! Imagine…true hyperinflation in a worthless currency! ;)

  • beowulf

    Sure it does, if NPV of the zero coupon is 0 then the NPV of the annuity is 100. There is no face amount to that obligation, for the purposes of the debt limit since a consol annuity only guarantees interest and not (per 3101) “guaranteed principal and interest”.

  • http://www.concertedaction.com/ Ramanan

    Sorry I don’t get you. If coupons of the consol is zero, nobody will buy the bond and the Treasury defaults soon after hitting the debt ceiling (because the Treasury has zero funds)

  • Госбанк

    if NPV of the zero coupon is 0 then the NPV of the annuity is 100.
    That is incorrect and even nonsensical on the face of it.

    An annuity, or any coupon paying bond, can be viewed as a portfolio of zero coupon bonds. In the light of such a representation, if *all* zeroes are real zeroes, the NPV of the annuity is also zero :)

  • beowulf

    Perpetuity does have a principal. The principal is simply equal to zero due to infinite time discounting, just as a special case of the vanilla bond.
    I rest my case :o)

    The 1935 balance sheet lists total public debt, NOT public debt subject to limit. We knows this because it lists the very Panama Canal consols you mention. The debt limit excludes debt issued prior to 1917, Panama Canal consols were issued from 1900 to 1902.

    Maybe Tsy counted the 1930 consols within the debt limit or maybe it didn’t, no way of telling since it treats them identically here to the Panama Canal consols. Doesn’t matter really, the laws have changed so much no court would hold Tsy to its procedures of 77 years ago. For one thing, these consols were only redeemed in 1935 because Congress had just prohibited bonds and notes from bearing the circulation privilege, so on that alone 2012 series consols would be legally distinguishable from the 1930 series.

  • http://www.concertedaction.com/ Ramanan

    Let’s say consols are auctioned and the stop (highest accepted bid) is 4.99% and the coupons are set at 5%.

    Consider another auction in which the stop is 5.01% and the coupons are set at 5%.

    The second case is a discounted bond because the price is below $100. So the second bond gets counted in the debt subject to limit and the first one is not a discounted bond and is not counted. Strange isn’t it.

  • beowulf

    Ramanan,
    In either case its interest-bearing (doesn’t matter if its discounted or not), so not subject to debt limit. By way of comparison, T-bills, sold on a discount basis and not interest-bearing, would be included in the debt limit.

    I agree, strange indeed, blame Congress. :o)

  • beowulf

    I was referring back to Ramanan’ point:
    “Of course interest is counted in the debt limit. The reason one doesn’t see it is because the NPV of interest payments and the NPV of the principal add to 100 usually.”
    Remember what I said above, think of a consol as a stripped perpetual bond where the public is sold the annuity (“NPV of interest payments”) and Tsy keeps the zero coupon (“NPV of the principal”). Remember too, Tsy doesn’t count obligations to itself as debt (as opposed to intergovernmental debt, between Tsy and agency trust funds). Tsy would be fine constructively holding 0 NPV zero coupon, because it keeps the proceeds from selling an annuity for a NPV of 100 and will never be obligated to buy it back (though it can choose to). Nonsensical sure, but that’s what makes it interesting!

  • http://www.concertedaction.com/ Ramanan

    Beo,

    Usually the phrase discounted is used for a zero-coupon bond but nonetheless a security which clears auction below par is called discounted and the USC makes no qualification and hence the law is to be taken to be applying for coupon bonds as well.

    Plus nowhere in the USC does it say that the principal amount is the face amount. Given many scenarios where the face amount is different from the principal and the funds raised at the auction will indeed be used to calculate debt subject to limit, it is clear that in other situations also principal won’t be used.

  • http://www.concertedaction.com/ Ramanan

    “Remember what I said above, think of a consol as a stripped perpetual bond where the public is sold the annuity (“NPV of interest payments”) and Tsy keeps the zero coupon (“NPV of the principal”).”

    Why is the coupon NPV of the principal. The coupon is the coupon which the lender periodically gets from the Treasury.

  • beowulf

    Not coupon, zero coupon
    “A debt security that doesn’t pay interest (a coupon) but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value.”
    http://www.investopedia.com/terms/z/zero-couponbond.asp

  • beowulf

    I’ve pointed out a few times where the usc distinguishes between discount basis, interest-bearing basis as well as discount and interest-bearing basis. 3103(c), added in 1989, only applies to the first.

    I just don’t know why I suffer this delusion that face amount is equivalent to principal for purposes of the public debt— it might have something to with that’s how the US Department of Treasury describes it.
    The Public Debt Outstanding represents the face amount or principal amount of marketable and non-marketable securities currently outstanding.

    http://www.treasurydirect.gov/govt/resources/faq/faq_publicdebt.htm

  • http://www.concertedaction.com/ Ramanan

    Sorry can’t catch you.

    A consol pays $2.5 every quarter. What’s its coupon – zero?

  • http://www.concertedaction.com/ Ramanan

    It is usually the case that for non-consols, the bond is priced near the principal and one doesn’t need to distinguish the two.

    The looseness of the Treasury FAQ cannot be taken as a proof that the face amount is equal to the principal for all bonds.

    The old law is gone and for someone in 2012, only what’s written in 2012 matters.

  • beowulf

    “Consols still exist today: in their current form as 2½% Consolidated Stock (1923 or after), they remain a small part of the UK Government’s debt portfolio. As the bond has a low coupon, there is little incentive for the government to redeem it.”
    http://en.wikipedia.org/wiki/Consol_%28bond%29

    In your example, we’d have to know how much Tsy was paid for the annuity to derive its coupon rate. If $100, then $2.50 a quarter means a 10% coupon rate.

  • Robert Rice

    I called the San Francisco Fed this afternoon and left a message with my question. I’d like to hear from them on what exactly happens to the principal they receive.

    In the meantime, you might enjoy this four part lecture series on the history of the Federal Reserve and our most recent financial crisis Bernanke taught just a couple weeks ago at George Washington University:

    Part 1: http://www.youtube.com/watch?v=E3fFg8XIS0k

    Part 2: http://www.youtube.com/watch?v=bw0qrC4FB_I&feature=relmfu

    Part 3: http://www.youtube.com/watch?v=GLoqPm1nYRU&feature=relmfu

    Part 4: http://www.youtube.com/watch?v=mWl6JI4KBTg&feature=relmfu

    Bernanke spends some time on the quantity of assets they hold, what was purchased during the LSAPs, and so on. I think he gets into this in both part 3 and 4.

  • Госбанк

    1. If you approach the question of whether the consol is considered as a security that counts towards the debt limit from the common sense/financial point of view, then it is indistinguishable from any other debt contract that the treasury entered into with a private party and should be counted in the same way namely by its face value despite the fact that there may be some slight variations between the face value and the market price on the action day. It’s a convenience compromise.

    2. If insisted on a formalistic treatment (Judge Posner, or any other business litigation judge, would laugh you out from his courtroom if you would :) ), then you would lose anyway because formally the consol satisfies the two prongs of the statute in order to be counted towards the debt, both the the face value requirement *and* the promise to repay interest and the principal if you are prepared to wait infinite time to get the principal back. In other words, the consol,even formally, is indistinguishable, other than in its tenor, from a vanilla coupon bearing bond.

  • beowulf

    then it is indistinguishable from any other debt contract that the treasury entered into with a private party
    Except that every other debt contract includes Tsy’s promise to repay “face amount or principal amount” (Tsy’s words not mine) upon the condition precedent of the debt obligation reaching its maturity date. Since consols have no maturity date, there is no promise to repay.
    If insisted on a formalistic treatment (Judge Posner, or any other business litigation judge, would laugh you out from his courtroom if you would :) )
    Except its not business litigation, its constitutional law. The showstopper is that the 14th Amendment unconditionally requiresthe govt to pay its obligations. The Supreme Court couldn’t have been more emphatic as to the importance of preserving the public credit of the US (“a power vital to the government, upon which in an extremity its very life may depend.”). If the govt asserts in courts that its 14th Amendment duty requires it to sell consols (hell, or even regular T-bonds) in excess of the debt limit, there is no judge, federal state or beauty pageant (well, maybe Perez Hilton, he’s craaazy) who wouldn’t throw out the debt limit statute itself as unconstitutional.
    the consol satisfies the two prongs of the statute in order to be counted towards the debt, both the the face value requirement *and* the promise to repay interest and the principal if you are prepared to wait infinite time to get the principal back…
    The face value requirement and the promise to pay principal are the same thing, the public debt is the “face amount or principal amount” of outstanding obligations. “When a bond matures, the investor receives the face value” (again Tsy’s own words). When there’s no maturity date, there’s no obligation to repay face value. “Prepared to wait infinite time get the principal back”, seriously? That’s so absurd I won’t bother answering it other than, google “rule against perpetuities” (and to answer your next question, “time runs not against the King”).

  • Госбанк

    “Prepared to wait infinite time get the principal back”, seriously? That’s so absurd I won’t bother answering it other than, google “rule against perpetuities”

    Perpetual government bonds are most likely beyond the scope of the rule against perpetuities, otherwise by your own logic they would be invalid contracts anyway because the consol holder will never be fully vested. Not only would the security holder receive no principal, but also none of an infinite number of coupon payments of some finite value.

    You cannot have it both ways: either the consol is invalid due to the rule and thus cannot be issued, or if it’s the rule does not apply then it is indistinguishable from the vanilla bond.

  • beowulf

    “You cannot have it both ways: either the consol is invalid due to the rule and thus cannot be issued, or if it’s the rule does not apply then it is indistinguishable from the vanilla bond.”

    You’re as predictable as the tides. If I may quote myself:
    “and to answer your next question, “time runs not against the King”.”

    Nullum tempus occurrit regi (“no time runs against the king”), sometimes abbreviated nullum tempus, is a common law doctrine originally expressed by Bracton in his De legibus et consuetudinibus Angliae in the 1250s. It states that the crown is not subject to statute of limitations. This means that the crown can proceed with actions that would be barred if brought by an individual due to the passage of time. The doctrine is still in force in common law systems today.
    http://en.wikipedia.org/wiki/Nullum_tempus_occurrit_regi

  • Госбанк

    If I may quote myself:
    “and to answer your next question, “time runs not against the King”.”

    Since you agree that the rule against perpetuities does not apply to the sovereign, per force you agree that the consol is no different from the vanilla bond in your formalistic universe.

    QED.

    Consider Mexico’s 100 year sovereigns to develop some intuition ;)

  • beowulf

    You’re assuming fact not in evidence so I reject your premise entirely.
    The rule against perpetuities does not apply to the sovereign lender, it does apply to the bondholder (yes there’s a double standard, its good to be king and all that). Just to boil down why you’re off-base, you made the argument that consols are just like vanilla bonds (which themselves violate the 14th Amendment but let that bide) by containing a promise to repay the principal at maturity since the bondholder is “prepared to wait infinite time get the principal back”.
    Except that’s legally impossible. A consol bondholder lacks a present interest in the principal, but you’re claiming he has a future interest with a condition precedent. That is, the bondholder WILL have the right to be paid the principal AFTER the expiration of infinite time (of course you’re grasping at straws, but I’m trying to be polite). This is legally impossible because (1) nobody can wait infinite time, or its not really infinite and (2) Even if you could wait an infinite time, the rules against perpetuities would void your future interest since it is impossible to vest within the span of an ascertainable life in being plus 21 years (some states use a flat 90 years— you lose either way). Mexico has never been a common law jurisdiction, so the rule against perpetuities is irrelevant.
    I’ve wasted enough time trying to explain this to you, I keep citing the relevant laws to you and you keep changing the subject (Mexican law?!?). If you haven’t figured it out by now, you’re not going to.

  • Госбанк

    1. Skipping redundant and irrelevant verbiage, the only argument you offer against the treatment of the consol as a variety of the vanilla bond is the former’s infinitite tenor, such tenor being barred by the rule of perpetuities.

    Such argument is misguided and self-defeating, as I demonstrated earlier. I’ll try to explain once more below.

    Assuming the rule applies and using your own words almost verbatim, “the bondholder WILL have the right to be paid the” [STREAM OF COUPONS] “AFTER the expiration of infinite time[…]. This is legally impossible because (1) nobody can wait infinite time, or its not really infinite and (2) Even if you could wait an infinite time, the rules against perpetuities would void your future interest since it is impossible to vest within the span of an ascertainable life in being[…].”

    Thus, by your own logic, the consol is an invalid contract, even more so, due to the holder inability to receive an infinite number of coupon payments that far exceeds, in value, the lone principal. We needn’t analyze whether or not the rule in fact applies at all since you already killed your own child with the rule :)

    2. I suggested Mexico’s 100 year bond as a way to to develop intuition with respect to the bond of extra long tenor, not as a legal argument. However, you may google for the “the 100 year gilt or the Osborne bond”. In case you did not know, the UK is a common law country.