The Latest Crazy Plan to Prevent a Default—Turn the U.S. Into Greece*

The Latest Crazy Plan to Prevent a Default—Turn the U.S. Into Greece*

*Well, except for the bailouts and debt restructuring part. Instead, the U.S. should issue banana republic bonds to stay under the debt ceiling.


We need the perfect crazy idea to defuse the debt ceiling, once and for all. Something that hits the Goldilocks of crazy: not so much that the White House would never try it, but just enough that they wouldn’t try it unless the alternative was default.

In other words, we need banana republic bonds.

What’s the most fiscally irresponsible country you can think of? It’s Greece, right? Yeah, it’s Greece. Its cooked budget books, bailouts, and debt restructuring have made it a banana republic minus the actual bananas. Now, Republicans keep predicting that we’ll turn into Greece any of one of these days, just keep waiting for it. And they’re wrong. But we might need to turn into Greece, at least a little, to avoid defaulting on the debt if we don’t lift the debt ceiling. It goes back to the budget chicanery bit.

See, Greece used accounting tricks to hide how much debt it really had for much of the last decade — and so can we.

As far as accounting tricks go, this is about a 3 on a scale of 1 to 10 (with Enron at 10). As Twitter’s Ivan the K (who you should be following) points out, the debt limit only applies to the face value of our bonds. So we just need to get investors to pay much, much more than face value to get the upfront cash we need to pay all our bills on time and stay under the debt ceiling. And we can do that if we sell a special kind of bond: a super-premium bond. We can call it a Constitution Bond, since it would help us uphold the 14th amendment and stay out of default. But the rest of the world would probably it a banana republic bond.

Let’s try explaining this without getting too much into bond math. Remember, a bond is just a kind of loan. The government borrows a certain amount of money for a certain amount of time, and agrees to pay a certain amount every year (or half-year, etc.) before paying back all the principal at the end. Now, normally the government tries to borrow for as low an interest rate as possible. But if it were willing to borrow for a high initial interest rate, it could get more money upfront. Here’s how. See, it’s a bond’s price, not its payments, that determine its interest rate. That’s because its price can change, but its payments cannot. So if a bond has a high payment relative to its price — that is, a high interest rate — investors will pay more up front until the price is high enough that its interest rate is the same as others. Neat trick.

And it’s a neat trick that could get us around the debt ceiling. Here’s a little more math. The Congressional Budget Office says the deficit this year will be around $ 670 billion, which gives us an average monthly deficit of $ 56 billion. As Matt Levine of Bloomberg View points out in his excellent primer on super-premium bonds, there are roughly $ 100 billion of Treasury bonds maturing each month — which means we would need to sell new ones with big enough coupons to turn that $ 100 billion of face value into $ 156 billion of actual value. Just how big would those coupons have to be? About 10.5 percent.

Now, the Treasury has its own rules against selling this kind of unnecessarily-high coupon debt, but those rules aren’t laws. They’re more like guidelines. This isn’t quite as crazy as it sounds, either, because we’re not really paying more than we normally would to borrow $ 156 billion. We’re paying more as interest to borrow $ 156 billion — but that evens out, because we’re “only” paying $ 100 billion back in principal at the end, not $ 156 billion. Think of it as just a most “extraordinary measure” by the Treasury to avoid going over the debt limit.

The debt ceiling is too dangerous to exist. We don’t know exactly what would happen if we don’t raise it, but we do know there’d either be catastrophic austerity or catastrophic austerity plus a financial crisis. So it’s pretty important that we do raise it in time — or, even better, abolish it. That’s no less true now that House Republicans are offering to raise it for six more weeks. They might have given up on the idea of holding the debt ceiling hostage to delay or defund Obamacare, but not holding the debt ceiling hostage to force entitlement cuts.

So we still need default insurance. Some way to ignore or get around the debt ceiling if it ever came to that. That could mean invoking the 14th amendment to declare the debt ceiling unconstitutional. Or paying people with IOUs. Or even minting a trillion dollar coin made of platinum (and only platinum). But all of these crazy ideas have their defects. Maybe the 14th amendment solution wouldn’t survive a court challenge, in the unlikely case anyone had standing. And it’s hard to see how IOUs would be neither money nor debt, but exist as Schrödinger’s payments. Nor would the Fed ever accept the trillion dollar coin as a deposit, and thus hand the Treasury control of monetary policy. But banana republic bonds are legal, not that crazy, and something the Treasury is already used to doing — selling bonds. They’re just, you know, banana republic-y. Then again, defaulting on the debt for no reason is even more banana republic-y.

Sometimes you have to pick the lesser of two crazies.

Business : The Atlantic


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