April 1, 2009
Answer for Brooks!
[Replying to this conversation]
Jim, your disagreement with my previous comment places your view even farther from B Davis’ view, not somewhere between my view and B Davis’. Correct?
Right.
Unless you’re saying that we can just roll over those $2 trillion of Special Treasury bonds held by the SSTF forever...
I did say that. The bonds do roll over forever. That's why we have 15-year bonds issued starting in 1984 that aren't going to begin to have anything paid on them until 2018 or so, with no problem.
Moreover , the bonds are redeemable upon presentation at any time, regardless of maturity date -- if not redeemed, they keep rolling over.
(Let's see you or someone in China try to buy US bonds with those terms. Good luck!)
The bonds also can be transferred by Congress to any other purpose, such as by being moved to the Medicare trust fund or into the Treasury's general holdings account.
So say Congress decided to reduce SS benefits post-2020 by means-testing "the rich" out, so the SS TF bonds aren't needed.
It can then let the bonds roll over until the year 3,000, or put them in the Medicare trust, or drop them in the Treasury and use them at will to "pay for" defense or agricultural subsidies or whatever. No "default" would ever occur.
(It would also make no difference financially to the govt, as intragovernmental bonds have $0 asset value to it -- every dollar of spending they represent has to be paid for with tax revenue just as if the bonds didn't exist.)
Congress can do absolutely whatever it wants with the bonds with no legal or "default" constraint. They are just tally markers representing spending promises that can be changed -- the Treasury's explanation of the bonds, such as in the Analytical Perspectives on the Budget, themselvessay all this, you will see if you look.
Sure, we could default on those bonds just as we could on the debt held by the public...
No we cannot! How would it be possible to do so? "Default", as far as bonds go, is a word with a specific meaning. Think about it for a moment...
"Default" requires that (1) on a bond's maturity date, (2) the issuer fails to pay the bond holder the bond's face amount, (3) so that the holder suffers a financial loss, (4) giving the holder a right to a judicial action that a court will hear.
Intragovernmental bonds are 0 for 4 on this -- they have no maturity date (but roll over forever) ... the issuer and the holder are the same person (is Congress going to make a claim on itself and refuse to pay it???) ... there is zero loss to the govt if the bonds are not paid off (do you have a loss if you don't pay something to yourself?) ... and since the govt owes the bonds to itself, nobody has a right to bring a judicial action to enforce payment on them (other than Congress and the fed govt, which is unlikely to sue itself for deciding not to pay itself.)
Explain: how can default on intragovernmental bonds possibly occur?
I am constantly perplexed by how people who see a relationship as obvious when it involves individuals and businesses become totally oblivious to it when it involves the govt.
E.g.: Say a person writes a legally enforceable note to himself, secured by all his property, in the amount of $100,000.
Everyone knows that doesn't make him richer by giving him a new $100,000 asset ... or poor by saddling him with a $100,000 debt ... and that if he doesn't pay himself, and then sues himself for "default", the judge will laugh ... and that Equifax and the credit rating agencies couldn't care less because it has $0 effect on your ability to service your debt to your third party creditors.
And if a business issues its own note to itself for $10 million, everyone knows all the exact same things.
But if the government writes a note to itself for $1 trillion, then 95% of the public somehow thinks: "that's a real asset that can be used to fund obligations .... and a real liability that must be financed ... and default would be a danger -- except that judges would enforce the 'full faith and credit clause' ... but if discussion of default even arose, the credit markets would go beserk!"
???????????????????????
I assume there would hurt our nation’s credit rating, so to speak, because I assume financial markets would not completely dismiss default on those Special Treasury bonds...
Say a nation over-commits to spending programs it can't afford, which hurts its credit rating, So it cuts back the spending programs. Will its credit rating then go up or down?
Say that nation is the US, and that Congress to show its iron commitment to Medicare, etc., issues another $40 trillion of intragovernmental bonds to fully back up its $53 trillion of unfinanced spending promises that are already on the books.
Then, as S&P and Moody's predict, the credit rating of the US starts falling in 2017 heading towards junk by 2027. In the crisis that ensues, an new Congress slashes promised spending and outright repudiates say $20 trillion of intragovernmental debt -- "default" if ever there was!
Does the massive "default" on the intragovernmental debt collapse the US's credit rating -- and drive the Chinese to hysteria? Or does it improve the US credit rating and leave the Chinese smiling?
[Replying to this conversation]
Jim, your disagreement with my previous comment places your view even farther from B Davis’ view, not somewhere between my view and B Davis’. Correct?
Right.
Unless you’re saying that we can just roll over those $2 trillion of Special Treasury bonds held by the SSTF forever...
I did say that. The bonds do roll over forever. That's why we have 15-year bonds issued starting in 1984 that aren't going to begin to have anything paid on them until 2018 or so, with no problem.
Moreover , the bonds are redeemable upon presentation at any time, regardless of maturity date -- if not redeemed, they keep rolling over.
(Let's see you or someone in China try to buy US bonds with those terms. Good luck!)
The bonds also can be transferred by Congress to any other purpose, such as by being moved to the Medicare trust fund or into the Treasury's general holdings account.
So say Congress decided to reduce SS benefits post-2020 by means-testing "the rich" out, so the SS TF bonds aren't needed.
It can then let the bonds roll over until the year 3,000, or put them in the Medicare trust, or drop them in the Treasury and use them at will to "pay for" defense or agricultural subsidies or whatever. No "default" would ever occur.
(It would also make no difference financially to the govt, as intragovernmental bonds have $0 asset value to it -- every dollar of spending they represent has to be paid for with tax revenue just as if the bonds didn't exist.)
Congress can do absolutely whatever it wants with the bonds with no legal or "default" constraint. They are just tally markers representing spending promises that can be changed -- the Treasury's explanation of the bonds, such as in the Analytical Perspectives on the Budget, themselvessay all this, you will see if you look.
Sure, we could default on those bonds just as we could on the debt held by the public...
No we cannot! How would it be possible to do so? "Default", as far as bonds go, is a word with a specific meaning. Think about it for a moment...
"Default" requires that (1) on a bond's maturity date, (2) the issuer fails to pay the bond holder the bond's face amount, (3) so that the holder suffers a financial loss, (4) giving the holder a right to a judicial action that a court will hear.
Intragovernmental bonds are 0 for 4 on this -- they have no maturity date (but roll over forever) ... the issuer and the holder are the same person (is Congress going to make a claim on itself and refuse to pay it???) ... there is zero loss to the govt if the bonds are not paid off (do you have a loss if you don't pay something to yourself?) ... and since the govt owes the bonds to itself, nobody has a right to bring a judicial action to enforce payment on them (other than Congress and the fed govt, which is unlikely to sue itself for deciding not to pay itself.)
Explain: how can default on intragovernmental bonds possibly occur?
I am constantly perplexed by how people who see a relationship as obvious when it involves individuals and businesses become totally oblivious to it when it involves the govt.
E.g.: Say a person writes a legally enforceable note to himself, secured by all his property, in the amount of $100,000.
Everyone knows that doesn't make him richer by giving him a new $100,000 asset ... or poor by saddling him with a $100,000 debt ... and that if he doesn't pay himself, and then sues himself for "default", the judge will laugh ... and that Equifax and the credit rating agencies couldn't care less because it has $0 effect on your ability to service your debt to your third party creditors.
And if a business issues its own note to itself for $10 million, everyone knows all the exact same things.
But if the government writes a note to itself for $1 trillion, then 95% of the public somehow thinks: "that's a real asset that can be used to fund obligations .... and a real liability that must be financed ... and default would be a danger -- except that judges would enforce the 'full faith and credit clause' ... but if discussion of default even arose, the credit markets would go beserk!"
???????????????????????
I assume there would hurt our nation’s credit rating, so to speak, because I assume financial markets would not completely dismiss default on those Special Treasury bonds...
Say a nation over-commits to spending programs it can't afford, which hurts its credit rating, So it cuts back the spending programs. Will its credit rating then go up or down?
Say that nation is the US, and that Congress to show its iron commitment to Medicare, etc., issues another $40 trillion of intragovernmental bonds to fully back up its $53 trillion of unfinanced spending promises that are already on the books.
Then, as S&P and Moody's predict, the credit rating of the US starts falling in 2017 heading towards junk by 2027. In the crisis that ensues, an new Congress slashes promised spending and outright repudiates say $20 trillion of intragovernmental debt -- "default" if ever there was!
Does the massive "default" on the intragovernmental debt collapse the US's credit rating -- and drive the Chinese to hysteria? Or does it improve the US credit rating and leave the Chinese smiling?