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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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