Comments for Allan Sloan Explains the Relationship Between Interest Rates and Bond Prices and How the Government Can Costlessly Eliminate Large Amounts of Debt at http://www.cepr.net , comment 1 to 11 out of 11 comments http://www.cepr.net Tue, 21 May 2013 23:39:20 +0100 FeedCreator 1.7.3 http://www.cepr.net/index.php/blogs/beat-the-press/allan-sloan-explains-the-relationship-between-interest-rates-and-bond-prices-and-how-the-government-can-costlessly-eliminate-large-amounts-of-debt#comment-21965 OK, I see. What's funny is that you could imagine a situation in which the government has funding problems even with a very low debt-to-GDP ratio - namely, if the interest burden was already high before the debt was bought back. - JSeydl Fri, 15 Feb 2013 10:46:22 +0100 http://www.cepr.net/index.php/blogs/beat-the-press/allan-sloan-explains-the-relationship-between-interest-rates-and-bond-prices-and-how-the-government-can-costlessly-eliminate-large-amounts-of-debt#comment-21964 [quote]... written by JSeydl, February 15, 2013 12:20 Dean, can you clarify something here? This only works if the cash obtained from issuing debt today is held. But that's not what's currently happening. The cash obtained from issuing debt today is being used to fund, for example, income security. If rates rise in 2015, the Treasury won't be able to buy back the debt at a discount, because the Treasury won't have the cash on hand. You could say that the Treasury could issue more debt today for the purposes of building up a cash position for when rates do rise, but that's a slightly different argument -- because investors might behave differently today if they suddenly saw the Treasury hoarding massive amounts of cash.[/quote] What cash? The Treasury issues $700 billion in new debt to buy back $1 trillion in old debt and, voila!, the debt is reduced $300 billion. The interest burden hasn't really changed, but if the deficit hawks were concerned about that then they wouldn't be concerned now, would they? But they love their little chimera - David Fri, 15 Feb 2013 10:38:58 +0100 http://www.cepr.net/index.php/blogs/beat-the-press/allan-sloan-explains-the-relationship-between-interest-rates-and-bond-prices-and-how-the-government-can-costlessly-eliminate-large-amounts-of-debt#comment-21963 Joe, On your question, the government just has to be able to borrow in 2016. Suppose the market value of 30 year bonds issued today has fallen by 30 percent. If it borrow $700 billion in 2016, it can buy back bonds with a face value of $1 trillion, leading to a net reduction of $300 billion in outstanding debt. It's simple, fun, and easy. - Dean Fri, 15 Feb 2013 08:37:19 +0100 http://www.cepr.net/index.php/blogs/beat-the-press/allan-sloan-explains-the-relationship-between-interest-rates-and-bond-prices-and-how-the-government-can-costlessly-eliminate-large-amounts-of-debt#comment-21962 Who do you believe? @ Bloix What makes you say that that the market doesn't agree with the CBO's forecasts? Isn't this the WaPo columnist's ostensible point, that if the CBO is correct than a lot of people will lose money? The market was wrong about housing prices never going back down. - Peter K. Fri, 15 Feb 2013 08:28:59 +0100 http://www.cepr.net/index.php/blogs/beat-the-press/allan-sloan-explains-the-relationship-between-interest-rates-and-bond-prices-and-how-the-government-can-costlessly-eliminate-large-amounts-of-debt#comment-21959 The CBO never predicts recessions and is always wrong on medium- to long-term horizons. Just thought i'd throw that in there. But you're 100% right -- yes it won't do anything but change the duration risk of the Treasury's portfolio, but it would be an easy way to manipulate the debt/gdp ratio to assuage the panic of frantic policymakers - Chris Engel Fri, 15 Feb 2013 07:05:50 +0100 http://www.cepr.net/index.php/blogs/beat-the-press/allan-sloan-explains-the-relationship-between-interest-rates-and-bond-prices-and-how-the-government-can-costlessly-eliminate-large-amounts-of-debt#comment-21958 John Lounsperry has an interesting post up regarding a Martin Wolff article on a parallel topic: http://econintersect.com/b2evolution/blog2.php/2013/02/13/martin-wolf-lord-turner-thinks-the-unthinkable Dr. Baker, I wonder if you would be interested in talking about some of the new discussion about monetizing the debt. - Mark Jamison Fri, 15 Feb 2013 06:41:57 +0100 http://www.cepr.net/index.php/blogs/beat-the-press/allan-sloan-explains-the-relationship-between-interest-rates-and-bond-prices-and-how-the-government-can-costlessly-eliminate-large-amounts-of-debt#comment-21956 [img]the Treasury would be able to purchase back much of the debt issued today at substantial discounts[/img] Dean, can you clarify something here? This only works if the cash obtained from issuing debt today is held. But that's not what's currently happening. The cash obtained from issuing debt today is being used to fund, for example, income security. If rates rise in 2015, the Treasury won't be able to buy back the debt at a discount, because the Treasury won't have the cash on hand. You could say that the Treasury could issue more debt today for the purposes of building up a cash position for when rates do rise, but that's a slightly different argument -- because investors might behave differently today if they suddenly saw the Treasury hoarding massive amounts of cash. - JSeydl Fri, 15 Feb 2013 06:20:11 +0100 http://www.cepr.net/index.php/blogs/beat-the-press/allan-sloan-explains-the-relationship-between-interest-rates-and-bond-prices-and-how-the-government-can-costlessly-eliminate-large-amounts-of-debt#comment-21955 Doesn't this imply that the market thinks that the CBO is wrong about future interest rates? - Bloix Fri, 15 Feb 2013 06:09:27 +0100 http://www.cepr.net/index.php/blogs/beat-the-press/allan-sloan-explains-the-relationship-between-interest-rates-and-bond-prices-and-how-the-government-can-costlessly-eliminate-large-amounts-of-debt#comment-21950 What would be the sign that the first sign that the CBO's predictions are turning out to be true? Sloan writes "The CBO is predicting that 10-year Treasury notes — which, remember, are currently yielding 2 percent — will yield 3.2 percent in 2015." So the 10-year note yields would rise from 2 percent in 2013 to around 2.6 in 2014 and keep rising? And their price would fall? Would their be an earlier signa? Stupid question, I know. - Peter K. Fri, 15 Feb 2013 05:17:28 +0100 http://www.cepr.net/index.php/blogs/beat-the-press/allan-sloan-explains-the-relationship-between-interest-rates-and-bond-prices-and-how-the-government-can-costlessly-eliminate-large-amounts-of-debt#comment-21949 The problem is that the coin would weigh as much as a ballistic submarine. http://www.slate.com/blogs/moneybox/2013/01/10/fox_news_coin_ignorance.html - Peter K. Fri, 15 Feb 2013 05:02:32 +0100 http://www.cepr.net/index.php/blogs/beat-the-press/allan-sloan-explains-the-relationship-between-interest-rates-and-bond-prices-and-how-the-government-can-costlessly-eliminate-large-amounts-of-debt#comment-21947 Would be easier to pay debt service off-budget with trillion dollar coin ($5T in net interest saved over next decade, even more for gross interest). Since apparently nobody likes the simplest solution to these sorts of things (Secretary of the Treasury could do this himself), Congress could enact a financial transaction tax with adjustable % rate pegged at one-tenth of 3 month T-bill rate. Whenever, if ever, the Fed raised rates, Tsy would receive more in taxes than it paid in additional interest. Thanks to the magic of the Constitution's fourth branch of government (which apparently only economists are aware of, maybe its written in algebra), adjusting monetary policy in the wake of either of these is the Fed's problem. - beowulf Fri, 15 Feb 2013 03:03:17 +0100