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….”)

 

Comments
  • Dunce Cap Aficionado April 11, 2012 at 9:45 am

    It appears we’re going to hit the debt ceiling sometime right before the election

    As if this was… all.. somehow…. planned….

    • Dan M. April 11, 2012 at 10:49 am

      Who will this hurt/help?

      I have to think it will hurt Obama, won’t it? In spite of repubs looking like fiscal terrorists?

      • Dunce Cap Aficionado April 11, 2012 at 11:13 am

        Agree- mostly helps GOP as it happens ‘on obama’s watch, again’

        It’s also a controlled distraction- something to argue over- something to barter over.

  • wh10 April 11, 2012 at 9:47 am

    is the Tsy permitted to buy back debt held by the Fed without such an action having been appropriated by Congress?

    • Obsvr-1 April 11, 2012 at 12:17 pm

      Isn’t debt held by the FED illusory ?

      The UST buys back the debt from the FED and the FED remits the money back to the UST, so effectively the debt does not exist and the UST didn’t spend any money to remove the debt, therefore no need to have anything appropriated by congress.

      • wh10 April 11, 2012 at 12:21 pm

        Does the principle get remitted? I thought it was just profit and the bond is retired. In any case, it still seems to require use of the federal purse to execute, and I thought that needed Congressional approval. I am sure beowulf has this sorted out.

        • Michael Sankowski April 11, 2012 at 12:36 pm

          beowulf knows all of this cold. But pretty sure the debt does not get retired when purchased by the fed.

          I’ve come around to the view bonds are tradeable term principal-insured saving accounts, and sometimes it’s hard to switch back to how they are viewed in the real world.

          • wh10 April 11, 2012 at 1:08 pm

            (meant retired when purchased by Tsy)

            • beowulf April 11, 2012 at 1:21 pm

              Why have the Fed do something irregular (which could be construed as a Greek-style partial default), when Tsy can simply buy it back fair and square with legal tender?
              I believe redeemed debt is extinguinshed (since the same party is on both sides of the contract).

              • Robert Rice April 12, 2012 at 12:32 am

                The Fed canceling the Treasury’s debt might be spun as partial default (although this would be inaccurate since the obligee is canceling the debt not the obligor failing to pay it), but printing/coining is going to be construed as inflationary, especially at a quantity needed to pay off a substantial portion of public debt.

                There seems to be two paths:

                1. Coin/print and pay down debt.
                2. The Fed buys up Treasury liabilities on the open market and cancels the debt, either by simply canceling the IOU contract (which they ought to be able to do since they are the entity to whom the money is owed) or by returning interest and principal to the Treasury following receipt.

                Both paths have their advantages and disadvantages.

                I’d like it if we could just coin/print and pay. I appreciate your guys’ sentiment. It is the most efficient and direct path. There however is real risk of a headline disaster given our current political environment. Isn’t it realistic to believe a headline like “The Treasury Begins Printing, Incites Inflation Fears” could compel a Tea party mob with the help of well meaning independents to institute a foolish, destructive austerity policy? As you know, the Ryan budget already passed the House. Don’t get me wrong, the flipside with the Fed canceling the Treasury’s debt is also politically problematic, if spun. Either path has a political hurdle to overcome. Which is more problematic seems an open question.

                • Robert Rice April 12, 2012 at 12:47 am

                  I will say I just read an article which addresses in part the concerns independents have on deficit spending (scroll to subheading “The Independent Equation”):

                  http://www.npr.org/2012/04/11/150437103/romney-and-ryan-a-budding-political-bromance

                  Since independents are concerned about this, it is a perfect set up for the GOP to rail against the Obama administration and Geithner specifically if the Treasury coins to pay down debt. “The inflation is coming! The inflation is coming!” They’ll propose cutting spending as an alternative. Given current economic understanding, what do you think the independents are going to do, side with coining or side with cutting? I’d bet a day in a Chinese prison they’d favor cutting and hand the GOP the election with a mandate. Not good.

                  What really needs to happen is a concerted re-education effort to the electorate, more specifically to openminded independents, which dispels the myths we all agree on, and which if dispelled, will save this country’s economy. We could start a website focused to independents, spend six months trying to get infront of enough of them before the election, and try to persuade enough of them of basic monetary operations and the quite sensible policy prescriptions which flow from this understanding. A thought. Our government isn’t going to do it. Maybe we could kill two birds with one stone, and dispel the inflationary concerns over coining as well as the concerns over too much Treasury debt if it’s owed to the Fed who purchased it via an LSAP on the open market. Could be time for the citizenry to lead instead of always looking to the government for leadership. We the people can captain the ship through these rough waters. Funding might even be available for this if MMTers, MMRers, can come together and support a cause they all agree on. I’d help with what I could.

              • Obsvr-1 April 12, 2012 at 11:12 am

                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.

    • beowulf April 11, 2012 at 12:41 pm

      Yes, the Secretary has the power to roll over and/or pay off our debts. Belatedly, I realized there’s another way around the debt ceiling… since the debt ceiling is measures by adding up the face amount of guaranteed principal.
      Tsy could issue perpetual T-bonds that never mature, what the Brits call consols, which would have no amount of guaranteed principal.

      • Dunce Cap Aficionado April 11, 2012 at 12:52 pm

        Don’t know if there’s enough meant on that bone to justify it, but the lay people such as myself could use a post on consols and how a US version would work, not necessarily just in regards to the debt ceiling.

        • Michael Sankowski April 11, 2012 at 1:52 pm

          If I have a choice between consols and a Trillion Dollar Coin being delivered to Fort Knox, I’d choose the Trillion Dollar Coin delivered to Fort Knox.

          • Dunce Cap Aficionado April 11, 2012 at 1:55 pm

            Hmm, why? Because the TDC is ‘sexier’ (more marketable)? or because the far right would cry havoc at the idea of ‘un-repayable’ debt? Or something else entirely?

            • Michael Sankowski April 11, 2012 at 8:55 pm

              You got it – I think the marketing of the TDC is awesome, and the idea of debt that “technically doesn’t count” against the debt ceiling might start a revolution.

              • Dunce Cap Aficionado April 11, 2012 at 10:25 pm

                I’ve told you before you have a great mindset for selling an idea. The TDC still has a major hurdle though, convincing the Austrians (the political supporters, not the actual economists) and the general Ron Paulers that coin seignorage is not inherently inflationary is going to be difficult even in normal to good economic conditions.

          • Tom Hickey April 11, 2012 at 2:54 pm

            Seems to me that consoles might be more feasible tactically though. I can the platinum coin gambit being using in extremity like preventing a voluntary default by a Congress that has lost its mind, but I doubt that an administration would use it otherwise, since it is an endrun around Congress and would create a political firestorm. Consoles might be better strategically as a permanent feature. That is what Cook suggested as I remember.

            • beowulf April 11, 2012 at 6:46 pm

              I made two suggestions to Brad DeLong last year.
              1. Rename Twitterstream Delong to Twitterstorm Delong
              2. Run with the consols idea and call them DeLong Bonds.
              One down, one to go :o)
              http://delong.typepad.com/sdj/twitterstorm-delong/

          • beowulf April 11, 2012 at 2:56 pm

            Agreed, I think consols would be preferred by economists and platinum coins
            by everyone else.

            • Michael Sankowski April 11, 2012 at 8:52 pm

              This is 100% accurate. Consols are superior in every way except the marketing. I keep seeing the helicopter feed from a military helicopter following the string of armored personnel carriers, complete with breathless coverage by my wife, Brinna Golodryga.

              We need the spectacle, we need the drama. My mom can understand making a high value coin, and while it would seem like a scam, it’s a legitimate scam in that it technically follows the rules and “pays down” the debt.

              But issuing a bond that never expires so it “doesn’t count” against the debt ceiling? Let me get this straight – We still owe this money, but it technically doesn’t count as borrowing?!?! Come on- that’s something some fancy-pants Washington insider lawyer would dream up to rip me off of my hard earned tax dollars! I’m mad as hell and I’m not going to take it anymore!

              • Greg April 12, 2012 at 5:13 am

                I used to think it would be best to make a real small coin and have some astro physicist (Neil deGrasse Tyson maybe) describe that the coin is made of the rarest metal in the universe, obtained in small quantities from asteroids.

                Now, I like the idea or it being a HUUUUUGE coin that takes twelve military personnel to carry. Or that is transported by helicopter and dropped through the roof of some building in Fort Knox.

                Either could be great theater.

                Bread and circuses

      • Tom Hickey April 11, 2012 at 12:57 pm

        IIRC, Chris Cook recommends this. Most Americans are not familiar with consoles. Could you explain how this would work, maybe in a post.

      • wh10 April 11, 2012 at 1:10 pm

        Beo, I am not doubting you, but where does the law say that? Also, when Congress appropriates the budget, is pay down of Tsy debt included?

        • beowulf April 11, 2012 at 2:37 pm

          Title 31 sects 3101 to 3121, in court now so that just from memory. I could Google it but that will cost you. :o)

          • wh10 April 11, 2012 at 2:49 pm

            Lol thanks

        • beowulf April 11, 2012 at 6:04 pm

          As to your point whether the Secretary needs an appropriation to buy back debt, the answer is no, If Tsy has the money in the general fund (and the Secretary can sweep Mint proceeds into the general fund at his discretion), it can be used to buy back its debt. 31 USC 3111 says (bolding the important part): An obligation may be issued under this chapter to buy, redeem, or refund, at or before maturity, outstanding bonds, notes, [etc]… money received from the sale of an obligation and other money in the general fund of the Treasury may be used in making the purchases, redemptions, or refunds.

          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.

          • Tom Hickey April 11, 2012 at 6:20 pm

            Thanks for the elucidation. I put up the section on consols at MNE.

          • Ramanan April 11, 2012 at 6:53 pm

            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 April 11, 2012 at 7:57 pm

              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.

              • Ramanan April 12, 2012 at 12:57 am

                The reason coupon payments disappear when the Treasury is issuing debt is because the bond is usually priced so as to have a value of 100 or 1000 (or whichever). That is to say that the coupons are adjusted based on the auction result.

                Hence the initial amount raised is automatically the face value and one usually doesn’t need to make a distinction. (The price may not exactly be $100 due to roundoffs etc).

                For non coupon bonds (different from STRIPS which anyway is not issued by the Treasury but allowed by the latter to be STRIPPed by Wall Street) the initial amount raised is not the par value because of discount. Hence the need for definition of face value.

                However (c) of 31-USC-3101 explicitly defines the face value of the “obligation” as the original issue price plus/minus.

                So investors may bid a consol at say 4% yield which means the Treasury pays $4 annually on every bond. The “original issue price” of this bond is roughly $100 and hence the face value is also roughly $100.

                So even though there is no principal and according to the Treasury may have zero face value, according to the USC it doesn’t seem to because it doesn’t refer to the principal but the issue price.

                • beowulf April 12, 2012 at 12:25 pm

                  “(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.

              • Matt Franko April 12, 2012 at 5:47 am

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

                Since Treasury can sell these things to the public AND GOVERNMENT ACCOUNTS, that means THE FED CAN BUY THEM from Treasury with RBs…. Checkmate! (except for morons).
                Resp

                • Ramanan April 12, 2012 at 6:51 am

                  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 April 12, 2012 at 8:23 am

                    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,

                    • Ramanan April 12, 2012 at 11:45 am

                      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 April 12, 2012 at 11:58 am

                      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.

                    • Ramanan April 12, 2012 at 1:04 pm

                      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.

                • Госбанк April 12, 2012 at 9:01 am

                  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).

                  • beowulf April 12, 2012 at 12:09 pm

                    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 April 12, 2012 at 12:13 pm

                      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.

                    • Госбанк April 12, 2012 at 2:13 pm

                      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.

                    • beowulf April 12, 2012 at 3:05 pm

                      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.

                    • Ramanan April 12, 2012 at 3:35 pm

                      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 April 12, 2012 at 4:20 pm

                      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.

                  • Госбанк April 12, 2012 at 4:37 pm

                    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.

                    • beowulf April 12, 2012 at 5:31 pm

                      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.

                    • Ramanan April 12, 2012 at 5:43 pm

                      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 April 12, 2012 at 5:52 pm

                      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)

                    • Ramanan April 12, 2012 at 6:16 pm

                      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.

                    • beowulf April 12, 2012 at 6:44 pm

                      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

                    • Ramanan April 12, 2012 at 7:10 pm

                      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.

      • Dan Kervick April 11, 2012 at 1:56 pm

        If the Treasury simply bought up all its own debt , maybe people would finally come to see that there is no fundamental purpose for government debt at all. The whole system is a throwback to an earlier time when most governments actually were mere users of primary forms of currency they didn’t fully control.

        The Fed could probably manage the policy rate with interest on reserves, and get out of the business of open market operations altogether. The government could cease issuing debt and target an annual deficit in each fiscal cycle – the gap between its planned spending and estimated tax revenues – and then simply pass a bill issuing some kind of order to the fed to credit Treasury’s account by the targeted deficit amount.

        There would still be room for all kinds of political debate, even with a constant annual deficit. Conservatives would want small government and low taxes; progressives would want larger government and higher taxes. And of course there would be ample room for debate on the size of the deficit, and whether the current deficit is too large and inflationary, too small and deflationary, or just right.

        But at least we could take all the hysteria demagoguery about the debt burden on our grandchildren off the table.

  • Cullen Roche April 11, 2012 at 11:00 am

    This is fun. It looks like we’re going to put the American economy on black/red and spin the wheel right before the election just so a bunch of lawyers can puff their chests out and look like they care about something. Fun times!!!!

    • Dunce Cap Aficionado April 11, 2012 at 11:14 am

      Don’t get me started on Lawyers…. (sorry Beo)

      • Cullen Roche April 11, 2012 at 11:18 am

        My whole family is lawyers so I’ve got no problem with lawyers. I just don’t think most lawyers should be guiding the economic policy of the USA. Carlos on the other hand, now, that’s a guy I’d give the keys to the castle.

        • wh10 April 11, 2012 at 11:45 am

          Interesting thing is the National Economic Council is largely made of lawyers instead of economists, although I think the Council of Economic Advisers mostly consists of economist wonks.

          • Cullen Roche April 11, 2012 at 11:57 am

            And the CEA is all neoclassical guys. Pretty awesome, huh?

            • Obsvr-1 April 11, 2012 at 12:18 pm

              were doomed …. ;-)

              • Cullen Roche April 11, 2012 at 12:38 pm

                I think things will change in my lifetime. At least I am seeing a big change in the way people are thinking about things. I think if MMT and MMR can continue to push their message out there the thinking will continue to change.

                • Obsvr-1 April 12, 2012 at 11:25 am

                  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.

            • wh10 April 11, 2012 at 12:19 pm

              :(

          • beowulf April 12, 2012 at 11:47 am

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

            • Obsvr-1 April 12, 2012 at 12:07 pm

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

  • Robert Rice April 11, 2012 at 12:22 pm

    At this point the Democrats have accepted the premise of the Republican argument as true–money printing is intrinsically inflationary–and as such they’ll be fighting a losing battle if they suggest the Treasury should print/coin money. A headline on the 5 o’clock news or in the papers indicating the Treasury is printing money simply isn’t politically acceptable. The Dems might as well drink poison by supporting that action with our current prevailing ecomonic understanding amongst the citizenry. If you accept money creation is intrinsically inflationary–and most of the electorate does–then cutting spending is the logical conclusion to deal with our debt. The problem is the Democrats either don’t know this belief is mistaken or don’t have the courage to challenge it. We do not have a debt problem as the Republicans claim, we have an insufficient supply of money in the hands of the people who will spend it problem. We have a demand problem, that’s it. People with more money do more spending which creates jobs… yack, yack, yack, I’m preaching to the choir. What the Dems need to do is challenge the premise that we have a debt problem as well as challenge the premise that money printing is intrinsically inflationary. Until they choose to fight the battle on a different battlefield, Romney and the Republicans are going to beat Obama with a consistent, persistent, and effective drum beat.

    Or, as I’ve been arguing elsewhere, the Fed could continue buying up the Treasury’s liabilities, which in substance eliminates the debt, although not on paper. On paper the Fed could simply forgive the debt, assuming there are not any legal hurdles. They’ll be doing that anyway once they hand all the money back to the Treasury that the Treasury paid in principal and interest to the Fed. With this policy, the Democrats could simply point out we owe ourselves the money (one branch of the government owes the other), so what’s the problem exactly? I think pointing this out at a minimum would win the independents and the election. And we might not drive ourselves right off a cliff with mistaken prudence, aka austerity, as seems to be the majority opinion.

    • Michael Sankowski April 11, 2012 at 12:39 pm

      At this point the Democrats have accepted the premise of the Republican argument as true–money printing is intrinsically inflationary–and as such they’ll be fighting a losing battle if they suggest the Treasury should print/coin money.

      This is more of the loser liberalism Dean Baker writes about. Also, I wrote something on the fallacy of the no-ponzi assumption which is buried in the middle of the math of Government Budget Constraint you’ll see Krugman and Delong pull out every now and then.

      “Or, as I’ve been arguing elsewhere, the Fed could continue buying up the Treasury’s liabilities, which in substance eliminates the debt, although not on paper. On paper the Fed could simply forgive the debt, assuming there are not any legal hurdles.”

      I think there are some problems with this approach and beowulf knows those problems. If he puts up a comment on this, I’ll move it up with yours so people know a bit of detail on this.

      • Erik V April 11, 2012 at 1:31 pm

        I think what Republicans say in public for political reasons is far different from what they actually beleive. If they really beleived money printing was inherently inflationary, then they wouldn’t be so comfortable running such large and persistant deficits. But Reagan and Bush II both ran decent sized deficits. Reagan’s was very big considering we were at peace and had a smaller trade deficit at the time, and we had good growth in the 80′s because of it. Even if the entire econcomics community came to accept the MMT/R view of the world, I doubt if a majority of Americans ever would. They can only relate economics to their own lives, so debt will always “feel bad”, and be “unsustainable”. Both parties will use whatever they can to win elections, and the debt can be a powerful issue. In practical political terms, the willingness to run large deficits is what we need from our politicians, and therefore I think the GOP is closer to MMR than the Dems. Even uber-liberals like Krugman basically want us to balance the budget in the medium term.

        • Robert Rice April 11, 2012 at 10:21 pm
        • Greg April 12, 2012 at 5:27 am

          The republicans think if the money is “printed” and given to responsible business owners and the like then much will be saved, and that which is doled out will be based on hard work and there will be no problems. They believe that if the money is printed and given to the irresponsible hordes, the spenders of society, that before long we’ll need wheelbarrows to buy bread.

          I dont entirely disagree with their notions about responsible spending I just dont think the people they think ARE the most responsible actually are. Some of the people I most admire in regards to how they get the most out of their incomes are people who make about a third of what I make. Most people I know who make 3-4x what I do are the worst when it comes to managing their expenses.

          Small sample group I know but just my experience.

      • Robert Rice April 11, 2012 at 3:44 pm

        It would be interesting to read what any hurdles are. This however isn’t a choice between one route with hurdles and one without; as mentioned previously, coining money will result in headlines which are not practical in this political environment. Obama would hand the election to the Republicans on a silver platter by coining money in any volume to fund the government’s obligations or to reduce its debt. Before any money printing/coining by the Treasury could be taken, the political constraint would need to be removed. The beliefs of the electorate would need to be corrected.

        This is why I’ve suggested additional Fed action. The LSAPs (QE) have already occurred twice. A third round of LSAPs and subsequent additional Treasury auctions allows the Treasury to fund its obligations without increasing the debt owed to the domestic sector. This doesn’t resolve the debt ceiling since on paper the Treasury is increasing the debt, but what it does is take the wind out of the claim that we have too much debt. How can the Treasury owe the Fed too much money? How can the government owe itself too much money? Thus it can be argued raising the debt ceiling is inconsequential given to what the debt is owed. Or even better as Cullen just argued, this gives a stronger basis for arguing the debt ceiling should be done away with altogether. Why would we care how much money the Treasury owes the Fed? Why should anyone care the government owes itself? The Fed just hands the money back to the Treasury anyway. I think people would get the point and see the Republican argument as hot air.

        But what do I know… Correct or incorrect no one is going to listen to me. That isn’t whining, that’s just a fact. I don’t have fancy letters after my name, only arguments which can be evaluated. In this world, arguments aren’t heard until people are emotionally ready for them, which typically means after they’ve learned the hard way.

        Anyone interested in going in on a bunker???? We’ll need it if we implement austerity.

        • Michael Sankowski April 11, 2012 at 9:01 pm

          I don’t know if I fully agree with the idea we need to remove the debt ceiling prior to minting large coins.

          Some part of the coin proposal is to demonstrate the fact we control our money. The coin does not need to be actually minted to be extremely effective. I guess Michael Woodford and I agree – expectations can change how the world behaves.

          The advocacy of a TDC could shift the debate in a way which would be very useful for long term prosperity.

          • beowulf April 11, 2012 at 10:51 pm

            Right, asking permission for something you already have the right to do is rarely the smart call.

          • Robert Rice April 12, 2012 at 1:25 am

            I’m not sure what I wrote which gave the impression I believe we would need to remove the debt ceiling prior to minting large coins, but I certainly never intended to convey such. I happen to agree with you gentlemen minting the coin would help avoid the need to raise the debt ceiling. The problem is fearmongering with inflation.

            In any event, I agree with you, the proposed coining policy could incite a much needed debate. Plan to fight inflation hysteria head on.

            But before going that route, consider the other path I’ve proposed: LSAPs followed by debt cancelation. Or the same in spirit where we have LSAPS followed by Fed principal and interest collections with subsequent surrendering of both to the Treasury (as they do currently with at least the interest). I understand beowulf’s concerns over the spun appearance of partial default, but might it be an easier, a more likely path of success? Rebutting the partial default claims seems easy enough.

            The Fed canceling the debt might be received by the electorate with relief. At a minimum I would think the electorate could support the Fed crediting the Treasury the principal with interest (assuming they aren’t already; earlier I assumed such, but that may not be an accurate assumption; I’m having difficulty finding an answer to whether principal collected by the Fed is subsequently paid to the Treasury, or whether the money just vanishes, or whether the Fed is holding it in some account or reinvesting in some other security).

            • Obsvr-1 April 12, 2012 at 11:54 am

              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 …

              • Robert Rice April 12, 2012 at 2:30 pm

                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.

                • Obsvr-1 April 12, 2012 at 3:07 pm

                  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.

  • beowulf April 12, 2012 at 1:40 pm

    “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.

    • Ramanan April 12, 2012 at 3:27 pm

      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.

      • beowulf April 12, 2012 at 4:03 pm

        “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)

        • Ramanan April 12, 2012 at 4:13 pm

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

          • beowulf April 12, 2012 at 4:29 pm

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

            • Ramanan April 12, 2012 at 4:30 pm

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

              • Michael Sankowski April 12, 2012 at 4:40 pm

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

              • beowulf April 12, 2012 at 4:52 pm

                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”.

                • Ramanan April 12, 2012 at 5:02 pm

                  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 April 12, 2012 at 5:27 pm

                  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 April 12, 2012 at 6:06 pm

                    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!

                    • Госбанк April 13, 2012 at 6:08 am

                      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 April 13, 2012 at 10:59 am

                      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 April 13, 2012 at 3:30 pm

                      “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 April 13, 2012 at 4:28 pm

                      “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

  • Ramanan April 12, 2012 at 6:18 pm

    “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 April 12, 2012 at 6:37 pm

      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

      • Ramanan April 12, 2012 at 7:04 pm

        Sorry can’t catch you.

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

        • beowulf April 12, 2012 at 7:33 pm

          “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.

  • Госбанк April 13, 2012 at 5:49 pm

    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 April 13, 2012 at 11:59 pm

      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 April 14, 2012 at 7:44 am

    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.