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Debt ceiling modest proposal — perpetuities

Summary:
The debt ceiling dance has started again. Read Treasury Secretary Janet Yellen in the Wall Street Journal. A modest proposal: Issue perpetuities.  The Treasury computes the total amount of debt by its face or principal value, not its market value*. If the Treasury issues a bond that pays coupons each year for 10 years and ...

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The debt ceiling dance has started again. Read Treasury Secretary Janet Yellen in the Wall Street Journal

A modest proposal: Issue perpetuities.  

The Treasury computes the total amount of debt by its face or principal value, not its market value*. If the Treasury issues a bond that pays $1 coupons each year for 10 years and then pays $100 at maturity, the treasury counts this as $100 additional debt. The Treasury ignores the coupon payments, and how much the bond actually sells for, i.e. how much the Treasury actually borrows, when the bond is auctioned.  

Now you see my answer: Perpetuities have coupons, but no principal. A perpetuity pays $1 forever. In reality, it pays $1 until the Treasury buys it back. 

The Treasury could also issue coupon-only debt, just the $2 coupons for 10 years. Or it could issue debt with huge coupons and small principal payments, $2 a year for 10 years and then an additional dollar in year 10, and say debt increases by $1. But perpetuities are great for all sorts of other reasons, so why not use this opportunity? 

Perpetuities can have fixed coupon payments or variable coupons. The Treasury could sell a perpetual bond whose interest rate equals SOFR (the new Libor), whatever the Fed is paying on excess reserves, etc. If the Treasury wants to borrow short to harvest temporarily low short-term interest rates, then floating-rate perpetuities do the trick. Of course I would rather also take this moment to start borrowing long, locking in absurdly low interest costs. 

The Treasury could lower debt outstanding now, by rolling debt into perpetuities, issuing new perpetuities, and buying debt on the open market, issuing perpetuities in return. Goodbye debt limit. 

Too clever? Maybe. OK, undoubtedly yes. But if economics lunchroom talk can consider trillion-dollar coins, we can talk about perpetuities. Or maybe a serious attempt to do this would bring US treasury accounting into the 1960s, with cutting-edge concepts like market values not face values,  duration not average principal maturity, and interest cost concept that goes beyond coupons, so that the debt limit and treasury accounting is more economically meaningful.  

Disclaimers: 

*I spent some time on google and the Treasury website trying to figure out just how debt subject to limit is calculated, and this is my best guess. If I'm wrong, please write and I'll issue a classic "never mind." 

Yes, I am guilty here of having the same answer in response to different questions. See here on why I like perpetuities for other reasons.  


John H. Cochrane
In real life I'm a Senior Fellow of the Hoover Institution at Stanford. I was formerly a professor at the University of Chicago Booth School of Business. I'm also an adjunct scholar of the Cato Institute. I'm not really grumpy by the way!

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