Who needs a trillion dollar platinum coin to render the debt ceiling irrelevant?
-
When you can issue Premium Bonds?
From Matt Levine:
Assume that the US Treasury, these days, can issue a one-year bond at an interest rate of 4.5%; that is not quite right but good enough.[1] Simplistically, you pay Treasury $100 today, and in a year, Treasury pays you back your $100, and also $4.50 of interest.[2] When this bond is issued, it increases the government’s debt by $100, the face amount of the bond.[3]
You could imagine a debt ceiling that worked a different way: You could imagine counting this bond as adding $104.50 to the debt, since that is the total amount that the government has to pay back in principal and interest. But that would be sort of economically nonsensical, and anyway it is not the way the actual debt ceiling works. The actual US debt ceiling statute caps “the face amount of obligations” issued or guaranteed by the government, meaning the principal amount, not the interest it has to pay. Principal repayment obligations count toward the debt ceiling; interest obligations do not.
Of course, you could pay Treasury $200 today to buy two of these one-year, $100, 4.5% bonds. That would increase the debt stock by $200. And in a year you’d get back $209: your $200, plus 4.5% interest on your $200.
The premium-bond gimmick is: Treasury sells you one one-year $100 bond today, with an interest rate of 109%. In a year you get back $209: the $100 face amount of the bond, plus 109% interest. That bond has a face amount of $100, but it is clearly worth $200 today: It is economically the same as the two 4.5% bonds from the previous paragraph. So you’d be willing to pay Treasury $200 for it: the $100 face amount, plus $100 of “premium” to make the yield work out. And Treasury would be willing to sell it to you for $200: It sells you this $100 bond for $200. Treasury gets $200 of cash. But technically this bond is only $100 of “debt,” of face amount, so it only increases the debt by $100.
You can do this for other maturities, with slightly more math. Today the 10-year Treasury note yield is about 3.6%. Instead of paying $100 for a 10-year Treasury note that pays a normal annual interest rate ($3.60 per year) and pays back $100 at maturity, you could pay $200 for a 10-year Treasury note that pays normal annual interest plus $10 per year, and pays back $100 at maturity. You get your $200 back — $10 per year for 10 years plus $100 at the end — plus interest on your money. But that $10 per year of principal return is called interest, and treated as interest for the debt ceiling. (The way the math actually works is that this bond would have about a 15.6% interest rate, that is, you’d get back about $15.60 per year plus $100 at the end.[4] ) It’s a “$100 bond” for purposes of calculating how much debt is outstanding, but it’s worth $200. So, again, Treasury can raise $200 by selling $100 of debt.
So every time $100 of debt comes due, Treasury can pay it back by selling $100 of debt for $200, keep the extra $100 to pay its expenses, and render the debt ceiling irrelevant.
Does this work? I have written about it a few times before, ages ago, and my rough sense is “meh, sure, probably.” Nobody likes it, but neither has anyone ever pointed me to anything that makes it impossible. Again, the debt limit statute applies to “the face amount of obligations” issued by the government, so a bond with a $100 face amount sold for $200 would count for only $100 of debt. The law also allows the Treasury to issue bonds “at any annual interest rate,” and to decide “the offering price and interest rate” of any issuance. So I think if the Treasury secretary said “we’re going to sell $100 face amount of 10-year bonds for $200 and pay a 15.6% interest rate on them,” that is quite gimmicky but also pretty clearly allowed by the statute. If Treasury did it, someone would probably sue, but I don’t think they’d have a very good case; the law gives Treasury a lot of flexibility.
