Yves here. I must confess that I can’t take as much interest as I ought to in the debt ceiling drama. This is a game of chicken. The Administration, despite all its posturing, is not going to default on Treasuries and kill the chance for a Biden reelection stone cold dead. And while Biden is chest-thumping, Yellen is acting like a frightened puppy. She can’t even credibly posture that the Administration has a few Houdini slipping out of his chains moves at hand. Why isn’t she at least talking up the $1 trillion coin to have the fun of watching some Republican heads explode?
Having said that, it seems pretty odd that (given my confession that I don’t like wasting mental energy on this topic) that I have seen a lot of discussion of the 14th Amendment and (at least in the past) of the platinum coin, yet comparatively little on consols, otherwise known as “Peter Pan” bonds because they never mature. They are just a steam of annual payments. Because there is no principal repayment, they allegedly don’t count as debt for debt ceiling computation purposes.
And yes, there is demand for this sort of thing. Even when I was a kid, Treasury traders would sometimes create “strips” by creating synthetic instruments composed of Treasury coupon payments only, and then separately trade the left-over principal payment. They’d also reassemble these instruments. I assume the reassemblage was an arb and have no idea if this activity occurs on the scale it once did.
Mind you, it’s not as if no one has ever brought up this device. Google shows articles in Forbes and John Cochrane in past debt ceiling dustups, and this year, one by Matt Yglesias early this year and even a New York Times piece by Paul Krugman in April. But I don’t sense Krugman has the clout he once wielded, and I don’t see anything resembling a serious policy paper treatment. So this idea looks to be on the far edges of legitimacy, and not moving out of there as quickly as the moment demands.
By Kevin Quinn. Originally published at EconoSpeak
I’m more and more convinced that the simplest way out of the debt-ceiling morass would be to start issuing perpetual bonds or consols (sometimes dubbed “Peter-Pan” bonds, since they never mature or grow up )which simply offer a fixed payment every year, with no face value. This would seem to be immune to court challenges — unlike the constitutional gambit or the platinum coin. The Republicans in the House are manifestly crazy, so there’s no hope there.
One question is how much bigger the term premium would be to borrow longer term in this way.