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The left gets in on the ‘financial innovation’ game
January 30, 2013, 7:33 am
Filed under: Uncategorized

Via @InfiniteGuest on Twitter, I’m told Matthew Yglesias says the US government should issue perps. As this really is just the logical, distilled extension of my super-coupon bond idea which solved the Debt Crisis a while ago (remember that?), I can only really say Let’s go for it.

Try to poke holes in it and it’s harder than you might think. You would actually rather see (at least, I’d rather see) the USG issue a bunch of perps than to rely more on TIPS, or issue floaters (as they’ve been pushing for). The risk is much more right-way round. You could say – for that reason – ‘who would buy these things right now at anything resembling a low yield?’ but that’s an empirical question, not a reason not to try it at all.

Or you can try a thought experiment as follows: suppose N years have gone by and USG has been relying significantly on perps for its funding. Now there are a huge face amount of outstanding perps and the USG is paying $X billion/year just to service them. Does this start to become a political problem? How will perps look ‘optically’ at that time? Will populist politicians start griping ‘why should we pay these fat cat perp holders forever, for doing nothing? It’s not like we owe them any money because they didn’t loan any!’ Does this lead to pressure to repudiate or ‘restructure’ them? (And therefore, for this reason, do people shy away from them now?) But again, this is a sort of double-hypothetical as a reason for not doing something. This danger could be lessened if the Treasury does their issuance ‘intelligently’, and has an active and intelligently-managed buyback program. (Hmm, can we assume that?)

At the very least, there would always be a background incentive to inflate away their value. Then you remember that part of the reason for issuing TIPS is supposed to be to give USG ‘credibility in fighting inflation’, since inflation hurts a USG that has issued a lot of TIPS. But of course inflation would really, really help a USG that has issued perps. Oops. But that just means the USG will have been doing things at cross purposes. What else is new. And did we really buy that ‘credibility’ in the first place, given that TIPS are just a small part of the debt mix?

There is also the juicy question of whether it would count as ‘debt’ for the purpose of the debt ceiling, since perpetuities/annuities ‘feel’ debt-like but need never be called and are actually treated as equity-like for some purposes. My ignorant knowledge of the debt-ceiling laws (which is open to correction), based on reading blogs, suggests: perhaps not debt at all!, in which case this really would be the loophole to end all loopholes, as Treasury could issue these without limit. So the possibilities are endless and delicious.

Makes you wonder why ‘financial innovation’ got such a bad name!

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6 Comments so far
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This already happens, only it goes by the name “public employee pensions.”

Comment by RPLong

Heh. I guess the diff is that they are currently ‘sold’ way too cheaply…

Comment by The Crimson Reach

So, just so I understand, you are saying that people should pay the government money. Then, the government pays them a small percentage of that money over time, but not the premium? Why would anyone take that deal, when they could get their premium back?

I guess if the “interest” is high enough, you are wagering that you will see more of your money before those with low fixed maturities? Isn’t that betting on a super-deflationary scenario?

Comment by Dave

You’ve understood correctly and the downsides you allude to are accurate. On the plus side though would still be the ‘safety’ (?) of having a piece of paper from USG saying ‘Holder gets $X/year, forever’, and the market apparently likes/needs ‘safety’. So, whether the downsides would make investors punish them too much (i.e. insist on buying them only at such a discount to 30yrs that it’s not really worth it to the government to issue them) is the empirical question that an auction would presumably answer.

Comment by The Crimson Reach

Actually, thinking about it, the left could be backhanded with this idea.

If perps are tradable, fire the social security administration and issue perps equivilent to the beneficiary’s SS income.. Future beneficiares are issued restricted perps that begin payment in the future. Bam, instantly privatized social security! Plus poor folks can trade their welfare for money today! Big banks would have to buy these assets from poor people, instead of receiving the benefit of front running the government for this kind of thing.

Comment by Dave

Dude, I thought this post was going to be about ‘benefit corporations’, in which you can book a profit consisting of social justice while reaping tax breaks equivalent to a nonprofit (without all the messy reporting obligations though). And the plan is to have pension funds invest in these benefit corporation in a special stock exchange to gin up the needed 8-12% annual returns.

I’ve only briefly summed them, it’s even worse than the little piece I put here.

Comment by A Lady




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