14th Amendment, Debt Ceiling & Perpetual Bonds

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When I read this (third article below), I thought of an earlier commentary by one of our peer-reviewed economists. This is what Robert Waldman had to say:

“Investors are glad to pay the Treasury to keep their wealth safe. Now consider the US Federal Government intertemporal budget constraint — the present value of spending must be less than or equal to the present value of revenue. What is the present value of revenue ? It is calculated by discounting revenues which grow approximately proportional to GDP by the inflation rate which hmm carry the one, round off a bit works out to roughly INFINITY.

If the Treasury can borrow at an interest rate lower than the trend rate of GDP growth (r<n), then the US Federal Government does not have a binding intertemporal budget constraint. This is the point of debt and taxes I, which turns out to be highly relevant to the Washington Post opinion page printed the day before yesterday. A totally standard calculation implies that there is not now a limit to “economic space” now. This is the normal pattern post WWII except for the period 1980-2000 — indeed the US managed the huge WWII debt with no noticeable trouble. Another way of putting this is that, if r<n then debt never has to be repaid. It can be rolled over forever and will shrink as a fraction of GDP until it is negligible. This is not a heterodox position — the link is to an AEA Presidential Address which is the epitome of orthodoxy.” Debt and Taxes IV: This Time It’s Personal, Angry Bear, Robert Waldman

In Employ America (below), The author Skanda Amarnath references an article (Biden Can Win the Debt-Ceiling Fight With Consol Bonds (nymag.com) by Eric Levitz. Unless I am mistaken, this is the same or similar to what Robert was saying above.

“In any case, a minimally dramatic or legally ambitious solution to the debt-ceiling standoff would be preferable. And the Treasury Department has one: It can keep funding the government through the sale of consol bonds.

In simple terms, a consol bond is one that never matures. A normal bond commits a borrower to paying back the principal on their loan plus interest at a set date. A consol bond, by contrast, requires the borrower to make annual interest payments forever but does not require them to pay off the loan’s full value at any particular point in time.

This is handy since the legislation establishing the U.S. debt limit defines the federal debt as the amount of principal that the government is obligated to repay. Thus, while a normal U.S. Treasury bond increases the national debt as defined by the debt ceiling, a consol bond does not. If the government borrows money via bonds that have no principal — only interest-payment obligations — then it can continue funding its operations indefinitely, even in the absence of a debt-ceiling hike.

There is a clear downside to the consol-bonds solution. In order to attract buyers for bonds that never mature, the Treasury will need to offer a high interest rate, increasing the cost of government financing. But this would still eliminate uncertainty about the government’s capacity to repay previously issued, normal bonds.” Biden Can Win the Debt-Ceiling Fight With Consol Bonds, nymag.com, Eric Levitz.

Skanda Amarnath references Eric Levitz’s solution which I have recouped part of directly above have to do with funding debt with Consol Bonds. The only issue I see is return on 30-year bonds being greater than when Robert wrote his piece. Perhaps, there is a different and lower rate for Consol bonds? In any case the idea is similar.

14th Amendment, Debt Ceiling & Perpetual Bonds: The Treasury Department is Hiding Political Failure In Technocratic Excuses, employamerica.org, Skanda Amarnath

Many thanks to Carlos Mucha for his generous assistance.

The 14th Amendment is strongly relevant to the debt ceiling, but unlike what some elected officials and journalists have claimed, it is not a ‘hidden power’ that can be invoked to carry out some obvious action. It is a Constitutional constraint that requires the Treasury Department to take any lawful action that would avoid a breach.

If there is a lawful action that simultaneously avoids both a breach of the debt ceiling and a default that violates Section 4 of the Fourteenth Amendment, the Treasury has a duty to pursue such action to the fullest extent. There are in fact multiple Constitutional constraints and considerations that the Treasury must take seriously right now, including the potential relevance of the Presentment Clause and separation of powers principles. All of these considerations make default and ‘payment prioritization‘ highly disfavored outcomes even on legal grounds, leaving aside the catastrophic economic implications. And the fact that Treasury appears to be operationally unready to undertake such lawful action—even though the debt limit was functionally reached over four months ago—is an act of constitutional malpractice of the highest order. We sincerely hope the Treasury is taking operational readiness more seriously than meets the external eye.

Thus far, Treasury seems to have gambled that political, media, and business-driven pressures on Congressional Republicans might force a change of heart towards a “clean” debt ceiling hike. But such a gamble is purely a speculative political judgment–and a poor one at that. Speaker McCarthy has political leverage and a fragile caucus to please–two facts that would have informed even the most novice of political observers away from a “clean hike” strategy that was divorced from credible unilateral solutions. Furthermore, none of the actors supposedly motivating the GOP caucus, like bankers or the business community writ large, has any interest in pushing the GOP towards a “clean hike.” Unlike everyday working Americans, such actors are unlikely to feel the worst of the political compromises that might be made to raise the debt ceiling. And they have insufficient incentive to weed out the moral hazard dynamics stoked by such concessions, all of which increase the needless prospect of future debt ceiling showdowns and default risk.

Now the most concerning piece of this: having failed both in its political strategy and in developing the operational readiness to undertake lawful alternatives, Treasury’s poor political judgments are being masked by technocratic justifications (‘the Supreme Court might block our action’ or ‘anything other than a debt ceiling increase would sow too much uncertainty and spook financial markets’). At every critical juncture, the Treasury in particular has been most eager to write off any pathway to a lawful unilateral resolution and seems poorly informed about the full suite of solutions available.

Make no mistake, multiple lawful solutions exist, and some do not involve strained interpretations of the law or even unprecedented actions.

If the Treasury is sufficiently competent, it would already be prepared to execute unilateral solutions that overcome the array of legal, technical, and political constraints. In addition to the more well-known “platinum coin” solution, the Treasury retains the authority to issue callable perpetual bonds, that too in the statutory provision that directly succeeds the debt ceiling in the U.S. Code. Unlike the statutes pertaining to the issuance of Treasury bills and Treasury notes, the statute pertaining to the issuance of bonds does not specify a time limitation in which there is to be a principal payment to be repaid. Issuance of perpetual bonds would straightforwardly not count against the debt ceiling because perpetual bonds have no face value and are issued exclusively on an interest-bearing basis. Issuing such instruments is not even novel; they have precedent and a substantive financial purpose other than avoiding the breach of the debt ceiling. The Treasury established the precedent and practice of issuing callable perpetual bonds before the debt ceiling and general bonding authorities were ever enacted.

Everything up to this moment suggests that the Treasury is not prepared to implement such solutions, and has instead chosen to travel down a dangerous path. It smacks of delusion to prematurely write off all credible alternatives in the hopes that ‘burning the ships’ might motivate a ‘clean’ debt ceiling increase on its own. We would argue that this reflects a lack of seriousness about the realities of a default, and a lack of respect for the Constitutional and statutory obligations officials are sworn to uphold. If what appears plainly obvious is in fact true, Treasury needs to be held accountable for its irresponsible approach to planning and tail risk preparation. We can only hope that the Treasury expeditiously demonstrates to the public that they are ready to take all lawful solutions to the debt ceiling showdown, including unilateral solutions, with the requisite seriousness.