Tag Archive: government default

Oct 12 2013

Economic Populist: Premium Bonds Would Disarm Default Threat

Just as the GOP Shutdown was getting underway, 2 October, Matt Levine at Bloomberg was calling on the administration to Mint the Premium Bonds!.

The creepy trick that has swept the nation* is the platinum coin option, in which Treasury mints a $1 trillion platinum coin, deposits it at the Fed, and suddenly has an extra $1 trillion of money to spend without incurring any debt (and, thus, without breaching the debt ceiling). This is a good trick as tricks go, and it’s been extensively advocated by Josh Barro, Paul Krugman, Matt Yglesias, Joe Weisenthal, basically every economics blogger really. I am unaware of any good arguments that the platinum coin wouldn’t work, but it does have the problem that it is really really really really obviously a trick. I mean, it’s a trillion dollar coin, come on. So it’s sort of sub-optimal symbolically, and would make people really mad. It’s a crisis-enhancer, although with the benefit of avoiding immediate default.

So there is an alternative that Matt Levine is putting forth:

Instead of just rolling those Treasuries — paying them off at 100 cents on the dollar by issuing new Treasuries at 100 cents on the dollar — it should pay them off at 100 cents on the dollar by issuing new Treasuries at 275 cents on the dollar and using the extra money to pay its bills. The 10-year yield today is around 2.6 percent, so you could sell a 10-year with a 23 percent coupon for 275 cents on the dollar.**** The 30-year is about 3.9 percent, so a 14 percent coupon should get you there. Etc. Math here.

Now, given my previous writing on Fixed Interest Payment Consol Bonds … would this work too?

Yes, in a functional sense, of course it would. Its a similar, though not identical, answer, but it goes through the same loophole. Premium bonds are, by law, counted on their face value. So any bond with a face value substantially below its issue price that is used to roll over maturing long term bonds would “roll back” the debt ceiling count.