Issuing Debt for as Long as Our Republic Will Last
So Jimmy Rogers thinks the US dollar is going down? He might be right. There are few roads out of this crisis (more than one can be used):
- High inflation (raise the nominal value of collateral behind loans, maybe?)
- Internal Default (with depression)
- External Default (including currency controls, and forced conversion to a new currency)
- Large rise in taxation (leading to deep depression).
- The Japan game, where the government attempts to force liquidity into the economy, leading to a low- or no-growth malaise.
At present, I think the government is pursuing the last of those, and avoiding inflation for now. It is not in the DNA of the Fed to inflate, ever since the era of the ’70s.
Now, there is one idea floating around that I would like to suggest that we don’t do, or, if we do do it, let’s do it in limited amounts, like TIPS. There is a proposal for Obama bonds — bonds issued by the Treasury in a currency other than dollars, such as the Japanese Yen. It’s been done before; but I would urge against it because it gives up a key advantage that all of our debt is denominated in a currency that we think we control. Why outsource that advantage to another central bank?
Anyway, I’ve discussed this earlier:
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David Merkel |
| A Modest Proposal for Balancing the US Budget in the Short-Run | ||
| 1/9/2007 11:06 AM EST |
This is not meant seriously, but an easy way to balance the US Budget in the short run is to issue Japanese Yen-denominated debt. Current interest costs would drop rapidly, and the budget would balance.
What’s that you say? What if the Yen appreciates versus the Dollar? The US has an ill-disclosed balance sheet, with many of its liabilities omitted, or merely disclosed as footnotes… Medicare, Social Security, the old Federal Employee defined benefit plan, etc., are all off the balance sheet. (And on the plus side, so is the value of most of the property of the government, as well as the present value of its taxation capabilities.)
Leaving aside other things that are off-budget (e.g., Iraq, Katrina relief), borrowing in foreign currencies is just another tool that the Federal government can use to put off today’s costs off to a future date. It’s something that our government does well.
Position: none, though I own TIPS, realizing that they are only second best to developed market foreign currency debt, and the US Labor department controls the CPI calculation…
My Idea
Lest I merely seem to be a critic, I have another idea that I think is more powerful: Issue 40-, 50-, 75-, and 100-year bonds. Issue TIPS versions as well. Hey, issue a perpetual — Consols! As I have said earlier:
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David Merkel |
| Now Let’s Have a Treasury Century Bond! | ||
| 8/3/2005 9:30 AM EDT |
George, I’m really glad to see that the Treasury has finally gotten a lick of sense, and is re-issuing the 30-year, which they should be able to at yields lower then the current long bond maturing in 2031 (probably 10 basis points lower).
Timing is anyone’s guess, but I would suspect two auctions — in November 2005 and February 2006 — in order to give the new benchmark bond sufficient liquidity. Given the absence of long issuance, demand for this bond will be very strong in the hedging community.
Now, the Treasury won’t do this, but my guess is that there is even more demand for a 50-year, or even a century bond (100 years). It would help pension funds and structured settlement writers match their liabilities. Those bonds could sell at yields less than the 10-year. Won’t happen, but I can dream.
Final note, this removes one of my reasons for lower long rates, but I am still biased toward lower long rates. The other reasons still hold.
none mentioned, though I own Treasury Securities of various sorts, both directly and indirectly (don’t we all?)
There is a decent amount of demand for safe long-dated debt from pension plans, life insurance companies, and other long-term fixed income investors. These bonds would likely have lower yields than the 30-year bond, because of buyers that like long fixed income because of its reliability in a crisis. (And, for bond geeks — high positive convexity.)
Personally, I think the market would happily digest a lot of really long debt from a seemingly strong entity like the US Government. What, are we going to let the Europeans have a monopoly on long sovereign debt here? 
US Treasury, be innovative — show the world how confident we are in the future of the US by issuing debt as long as we think this republic will last. Surely that is longer than 30 years.
November 25th, 20086:37 pm at
Nobody ever got rich betting against Jimmy Rogers.
(he does have a long-term view though, and readily admits to being a lousy short-term trader)
November 26th, 20083:21 am at
David – if possible, whenever you have a chance, could you please explain why there is any spread whatsoever between govt-guaranteed bank-issued debt (e.g., the GS TLGP bonds) and comparable treasuries. It would seem they’re one and the same – thus no default risk. Thank you very much!
November 26th, 20088:56 am at
David,
“It is not in the DNA of the Fed to inflate, ever since the era of the ’70s.”
Are you referring only to a deliberate inflation as a policy response to a crisis, or to a general debasement of the currency? I might agree with the former, but I think the latter can be easily disputed with a look at gold.
Thanks
November 26th, 20089:21 am at
There are two reasons stimulus packages are popular economic issues:
* Politicians like excuses to spend more of our money.
* And the public is made to think that they are bound to work, because politicians and the media promote it as a one-sided thing. So, it seems obvious that if government spends more money – or cuts taxes – the economy is bound to improve.
November 26th, 20081:02 pm at
sysin3: “Nobody ever got rich betting against Jimmy Rogers.”
Are you sure about that? He was bullish on China back in the mid-90’s! Yet someone long the US markets, but avoiding obvious bubbles like tech, would likely beat China so far.
Jim Rogers is good but it’s not as if he is always right. I mean, we have Warren Buffett betting directly against him. Rogers has implied all investment banks are going bankrupt but Buffett is long Goldman Sachs.
November 26th, 20087:26 pm at
Relating your last two posts: banks are about to issue foreign-currency denominated bonds backed by the full faith and credit of the USA under the FDIC’s TLGP program. Maybe some day the FDIC can acquire these bonds and trade them to Treasury for some dollar Treasuries. Then we won’t have to show any weakness to the international community.
Thank god nobody else in the world has a credible reserve currency paying positive real interest rates! We should all be thanking our underappreciated i-bankers for selling the world so much toxic debt that their governments and corporations are just as unhealthy as ours!
November 26th, 200810:59 pm at
The treasury should be throwing out as much paper as the fixed income investors will bear. At these record low yields, the US Treasury needs to throw some paper on this fire. I really like the idea because the credit of the US government will probably deteriorate over time and rates will probably rise, so the 4% coupon that the feds will offer on a 100 year bond will turn into a 15% YTM in 50 years. This is exactly what happened to the long running Tribune Co. & Ford Motor bonds, their credit deteriorated big time and the great safe coupon that the investors thought was there just got a lot less enticing. Sounds like a great plan to me. I just wish Hank & Co were better traders.