The impending “crisis” over the debt ceiling is really stupid.
And while I expect it to get stupider in the months to come, we all should ignore it.
I’m not worried for two reasons: creative financial engineering in the form of a bond-math gimmick and the reality of what makes the world go ’round.
In the long run, my absence of angst will be validated, but in the meantime, many groups have incentives to maximize fear about this so-called crisis, which means we’ll be subjected to hearing too much about it.
First, you need to understand some baseline facts about the debt ceiling, which is the amount of money that the U.S. government is authorized to borrow.
The current debt ceiling, set by Congress, is $31.4 trillion. Because we are close to reaching this limit, Treasury Secretary Janet Yellen said last week that her department will begin preparing to deal with the restriction.
The debt ceiling is not about setting this year’s budget, which is something that this year’s Congress has control over.
Rather, it’s about borrowing to meet past obligations.
To stop payment on past national debt obligations — because of maximalist games of financial chicken by members of Congress — would light a torch under the global financial system. It is the financial equivalent of shooting your face with a shotgun because your dermatologist won’t perform a mild skin abrasion on your nose.
Fun with bond math
Let me tell you about the short-term, gimmick solution to the terroristic-style, non-negotiation over the debt ceiling that we are headed toward. This gimmick, which I learned from some smart newsletters, makes absolute sense. Also, it gives me a chance to do bond math again, so I’m so happy.
U.S. Treasury bonds, issued to fund the national debt, usually are sold to investors with coupons that reflect prevailing interest rates. In the bond world, a coupon refers to the interest that gets paid semi-annually to lenders. As I write this, 10- and 30-year interest rates are about 3.5 percent, so most new bonds issued today would be sold with a 3.5 percent coupon.
But without Congressional intervention, the Treasury could issue high-coupon bonds.
If it issued a 30-year bond with a 15 percent coupon, for example, the market today would value this at 312 percent of face value. That means that you could sell $1 billion in nominal face value for $3.12 billion in proceeds. An arbitrary debt ceiling of $31.4 trillion can easily be breached by selling whatever face value increments are needed to stay under the ceiling while raising the funds needed to continue to meet our past obligations.
There’s nothing magical about 15 percent coupons or 30-year bonds. The Treasury could issue 30-year bonds with a 23 percent coupon, for example, for which the market would pay $4.6 billion per $1 billion face value today. They could issue 10-year bonds with a 17 percent coupon, for which the market would pay $2.93 billion at today’s rates.
In other words, if the stupid debt ceiling says you can’t issue any more than $X billions, then a program of high-coupon bond issuance gets you multiples of $X billions in proceeds, even though technically and officially you’ve only issued $X billion of debt — in face value.
To be clear, this is a gimmick — and stupid.
It’s also brilliant, and it works, and I love it because financial engineering is fun and the debt ceiling argument is so stupid.
And yet putting such a gimmick into practice is much less stupid than a faction of the Republican Party holding the U.S. and global financial systems hostage to make a point about which party is a bad-faith actor.
A fiscally responsible course of action, for whomever is in charge of the House of Representatives, is to enact balanced budgets and fiscally positive legislation. Republicans claim to be the fiscally responsible party, which is, with all due respect, complete hogwash. It’s delusional madness unhinged from reality.
The last time we got close to eliminating the national debt was 23 years ago, at the end of the 1999 tech boom and the Clinton administration. The Iraq and Afghanistan wars of choice blew that up — thanks, George W. — and we’ve never looked back. Meanwhile, the Trump administration, with a unified Republican-majority Senate and a House led by deficit (chicken) hawk Paul Ryan, passed a tax cut that added $3 trillion to the national debt. (I will never get over this.)
On ExpressNews.com: Taylor: Paul Ryan’s terrible legacy
I’m not saying the Democrats are good at reducing spending; they’re not. But I am saying that Republicans have no factual claims to fiscal responsibility — only delusional ones.
It would be fiscally responsible to cut defense spending, by far the largest discretionary budget item every year. You don’t see that being publicly proposed by any important leader, Republican or Democrat, as the way to pass a balanced budget, even though it is the most logical case to make. An actual fiscal conservative would make cutting defense spending their central plan for balancing the budget. It’s where the money is.
Why I’m not worried
When all is said and done, I don’t think the debt ceiling debate is really worrisome.
I realize many groups have an incentive to make it seem as scary as possible.
Meanwhile, a faction of the Republican Party has incentives to maximize pain as a negotiating tactic. The 15 votes it took to elect U.S. Rep. Kevin McCarthy as House speaker this month were a muscle-flexing exercise that everyone understood to be a preview of maximalist negotiations — like for the debt ceiling.
Democratic opponents have incentives to maximize the howling and shaming of the maniacs, so in that sense, they are also happy to fight about the debt ceiling.
Financial and political media have incentives to stoke a combination of fearmongering and finger-pointing, as it makes people angry on all sides and helps gain website clicks and TV viewership.
Fortunately, there are groups that do not have these same maniacal incentives to burn it all down: wealthy people, financial institutions and industrial conglomerates.
And do you know who funds all members of Congress?
Wealthy people. Financial institutions. Industrial conglomerates.
They have a lot at stake in not having the U.S. government default on its debts.
Highly informed, thoughtful people will watch the coming brinksmanship over the debt ceiling fight in Congress as yet another example of the impending decline of Western civilization.
Yet I’m not worried.
While members of Congress think they are in charge, that status rests with the people who fund their campaigns, and those folks really don’t want to see it all burn down. Liberal, conservative, radical, libertarian, communist, centrist, whatever label you want to give to wealthy people and institutions — a smoothly functioning bond market is fundamentally important to the people actually in charge. They may disagree on everything else, but they really like maintaining wealth, and a functioning bond market — which includes the United States not defaulting on its past obligations — is perhaps their single-most agreed-upon value.
This may sound undemocratic and cynical, but it is the way the real world works.
Michael Taylor is a columnist for the San Antonio Express-News, author of “The Financial Rules for New College Graduates” and host of the podcast “No Hill for a Climber.”
michael@michaelthesmartmoney.com| twitter.com/michael_taylor
