The Consol Solution To The Debt Ceiling Crisis

Yeah, I know.  It is not currently a crisis.  That is Obamacare, blah blah blah.  But that website will get fixed and those who lost their crappy insurance policies will get them extended, blah blah blah.  The remaining serious crisis that could still plunge the world economy into a massive economic plunge, even with the very wise and capable Janet Yellen at the helm of the US Fed, would be a US default on its debt following a failure to raise the debt ceiling in time, with the most likely scenario for this being increasingly delusional Congressional GOPsters out to destroy the economy so they can get elected blaming it all on socialist Obamacare, blah blah blah.  Probably wise heads, or at least not completely delusional ones, will prevail, but the fury and delusions in the weird sub-media bubble of the teabags seems to be intensifying.

Now quite a few of us, including such folks as Bill Clinton, Bruce Bartlett, me, and a lot of others, have said that how Barack Obama should deal with this once and for all for all future presidents and the US and world economies, is to declare this motherfucker of a debt ceiling unconstitutional, which it is, even if a GOP dominated SCOTUS might disagree.  But one of them might realize the threat and support reason on it, if faced with the prospect of a massive global economic collapse as bad as anything ever seen.  In any case, Obama has not followed our advice, and given that he pulled off the latest crisis with only the most minor of market blips may be making him complacent, as well as his enemies, who likewise given the lack of market fear (for once ratex worked; they forecast the ceiling would be raised and it was), may not be held back and may take us over the brink.  It is much more likely than most today think.

So, in yesterday's (Nov. 15) Washington Post in its Friday forum, there is an innovative and interesting column on this issue by James Leitner and Ian Shapiro, "A new tool to avert a debt crisis," and I completely agree with them and wish to publicize this alternative tool to those that Obama has rejected (there is also the goofy trillion dollar platinum coin alternative, which both the Treasury and Fed have publicly declared they will not go along with).  This solution is to issue consols if the Congress foolishly refuses to raise the debt ceiling in the nest round of this silliness coming up early next year.

The column taught me things I did not know.  The term "consol" is short for "consolidated," and sometime in the 1700s the UK consolidated a bunch of long-term bonds. Then in the 1800s they began to issue the actual consols, bonds with infinite maturity, public "annuities" if you will.  They just pay interest forever.  Quite a few were issued in the heyday of British domination of the world economy in the Pax Brittanica of 1815-1914.  Some were retired, but according to Leitner and Shapiro some still exist in the UK government portfolio, still paying their interest.  Of course in fin econ textbooks they are the real world example for that nice simple back of the envelope formula that is also relevant for real estate that says that PV = NR/r, where PV is present value, NR is a constant real net return forever, and r is the real interest rate or discount rate for this most basic of present value calculations.

Anyway, Leitner and Shapiro point out a curious detail of how the US legally measures the national debt: only bonds with finite maturities add to it.  So, if the debt ceiling is hit, the US Treasury could issue consols that will not legally add to the national debt.  The US Treasury will be able to continue to borrow money and pay bills and avoid defaulting while not legally adding to the national debt.

OK OK, there is a dark side, and I give them credit for recognizing it.  These consols may require higher interest rates than other US government securities, in violation of the usual pattern that longer term securities provide lower yields.  They suggest that if Obama is forced to issue these at higher than usual interest rates he publicize how much these are costing taxpayers and blame it publicly and loudly on the reprobate Congresstrolls.  The only further thing they suggest is that the Treasury get at issuing a few soon to get a target interest rate and prepare everybody.  I completely agree.