patrick.net

Treasury Nears End of Era, Redeems Highest Rate Bonds (Update2)
By Daniel Kruger and Vincent Del Giudice - January 15, 2009 16:04 EST

Jan. 15 (Bloomberg) -- The Treasury Department, with U.S. government bond yields near all-time lows, is close to lowering the curtain on an era when it paid the highest interest rates on record to borrow.

The Treasury is redeeming $4.5 billion of 13.25 percent bonds due May 15, 2014. That leaves only two issues from the series of callable bonds it sold beginning in the late 1970s, said Steven Meyerhardt, a spokesman at the Bureau of Public Debt in Washington. The early retirement of the 13.25 percent bond will save about $2 billion in interest.

The government began selling callable debt in response to yields that reached as high as 15.21 percent on the 30-year bond in October 1981, said William O’Donnell, U.S. government bond strategist at UBS Securities in Stamford, Connecticut, one of 17 primary dealers that trade with the Federal Reserve.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=alUfiz5tqqew

So other than a huge gift to Wall Street, why did the govenrnment even begin selling treas(which led to astronomical spending by Reagan shortly thereafter)?

smaulgld says

Just like the people who owned dollars and bonds issued by the confederacy-
they lost 100pct

At least that affected the benefactors of the slavery/free labor. Screw 'em, for not fighting in a war for that, like those who did and had to compete against the slavery/free labor.

Upisdown says

"At least that affected the benefactors of the slavery/free labor. Screw 'em, for not fighting in a war for that, like those who did and had to compete against the slavery/free labor."

Yes but the real point was that when sovereigns dont pay the bond holder has no recourse
The result would have been the same with Lincolns greenbacks and war bonds had the union dissolved - they would have become worthless

Upisdown says

"So other than a huge gift to Wall Street, why did the govenrnment even begin selling treas(which led to astronomical spending by Reagan shortly thereafter)?"

Deficit spending made possible by issuing bonds didnt start with the obama adminstration or the Reagan one.
Not sure what you are asking or if you are making a point that I might have missed
Please clarify

smaulgld says

Deficit spending made possible by issuing bonds didnt start with the obama
adminstration or the Reagan one.
Not sure what you are asking or if you are
making a point that I might have missed
Please clarify

From the article above that I linked to it started in 1977.Why? It has just led to excessive and stupid spending, and apparently wasn't needed to help fund the government prior to that point.

smaulgld says

Yes buy the real point was that when sovereigns dont pay the bond holder has
no recourse
The result would have been the same with Lincolns greenbacks and
war bonds had the union dissolved - they would have become worthless

True, but the greenbacks were the legal money of the time, and things were complicated by counterfeiting, lack of monetary/policy controls.

These kind of blow the hyper-inflation argument out of the water, no?

Topic 6: Inflation and Interest Rates: Some Evidence

It is now time to take a look at the interest rate and inflation experience of a number of countries to see if the empirical evidence is consistent with the ideas developed in this lesson. Let us begin with the United States. Figure 1a plots the year-over-year rate of inflation (of the CPI), calculated on a monthly basis, and the corresponding annual yield or effective nominal interest rate on U.S. Government long-term bonds. Figure 1b plots the the realized real interest rate calculated by subtracting the actual inflation rate from the long-term bond yield.

http://www.economics.utoronto.ca/jfloyd/modules/evin.html

and:

Budget Deficits and Interest Rates: What Is the Link?

Two recent studies have measured the influence of budget deficits on interest rates. The first of these studies, by Thomas Laubach, finds a "statistically and economically significant" relationship between higher deficit projections and future long-term interest rates. According to Laubach's estimates, when the projected deficit to GDP ratio increases by one percentage point, long-term interest rates increase by roughly 25 basis points. A more recent working paper, by Eric Engen and R. Glenn Hubbard, found that when government debt increased by 1 percent of GDP, interest rates would increase by about two basis points.

The Laubach study implies that moving to a balanced budget would tend to reduce interest rates by about one percentage point; however, the Engen and Hubbard study suggests that interest rates would only fall by roughly a tenth of that amount. While recent research confirms there is a significant relationship between budget deficits and interest rates, just how much deficits affect interest rates is still being debated.

http://www.stlouisfed.org/publications/cb/articles/?id=874

upisdown says

From the article above that I linked to it started in 1977.Why? It has just led to excessive and stupid spending, and apparently wasn't needed to help fund the government prior to that point.

The issuing of bonds didn't start in 1977. Issuing treasury bonds has been a permanent feature of US finances.

What the article was pointing out was that during that time period the US had very high interest rates even on the 30 year note. The article was pointing out that the last of those bonds is being paid off.

The lower the rate of borrowing the more spending a private individual will make. Higher rates discourage spending and encourage saving.

upisdown says

True, but the greenbacks were the legal money of the time, and things were complicated by counterfeiting, lack of monetary/policy controls.

Legal or not if the union dissolved those green backs and government bonds would have become worthless.
The confederate money was legal during its period of existence but once they were defeated they "went out of business" and their money became worth nothing.

I think you understand the point I was making without confusing the union and the confederacy, that money and debt obligations are backed by nothing other than the full faith and credit of the issuer and have no intrinsic value.

Compared to corporate bonds(esp secured bonds) that are backed by the assets of the company, or gold or silver which have intrinsic commodity value.

upisdown says

just how much deficits affect interest rates is still being debated.

True
I don't purport to know the answer to that one.
The point of the original blog post above (did you read it?) was that the unnecessary threat of default made by the President, the treasury secretary, the democrats and the Republicans unsettled our largest creditors the Japanese and Chinese.

This is not good for the prestige of the US and the value of the dollar.

Keep in mind in our entire discussion above-that is all the US has going for it-the dollar and the treasuries are backed by NOTHING other than the ability and promise to pay.

In the last three weeks, the President, the Treasury Secretary and the heads of the Republican and Democratic parties made it clear that maybe we don't have that ability.

smaulgld says

that money and debt obligations are backed by nothing other than the full faith
and credit of the issuer and have no intrinsic value.

The US is what gives them the value, with a $16+ trillion economy. That's not peanuts. If that wasn't the case NOBODY or NO ENTITY would buy them.

smaulgld says

Compared to corporate bonds(esp secured bonds) that are backed by the assets of
the company,

The USA government doesn't have assets, along with the economic activity? That $16+ trillion GDP is what helps secure repayment of the government's debt, not magic dust or wishful thinking.

smaulgld says

Keep in mind in our entire discussion above-that is all the US has going for
it-the dollar and the treasuries are backed by NOTHING other than the ability
and promise to pay.

See my remark about the GDP, and congressionally mandated taxes.

smaulgld says

In the last three weeks, the President, the Treasury Secretary and the heads
of the Republican and Democratic parties made it clear that maybe we don't have
that ability.

No, after 42 attempts by the republican party to repeal a law without going through the normal legislative process, the republican party again tried to subvert the legislative process by throwing a temper tantrum and trying to tie the ability to pay the government debts and the accompanying process of paying for the already mandated operations of the government, together. It has nothing to do with ability, or even what, because of their own prior approvals of spending.

Stupid move by the republicans? YES, and they were willing to sink not only a big part of the economy, but the government as a whole as well. The republicans are 0-43 on their endeavors.

upisdown says

The US is what gives them the value, with a $16+ trillion economy. That's not peanuts. If that wasn't the case NOBODY or NO ENTITY would buy them.

Correct that works until the US starts threatening not to pay

upisdown says

The USA government doesn't have assets, along with the economic activity? That $16+ trillion GDP is what helps secure repayment of the government's debt, not magic dust or wishful thinking.

It doesn't- the GDP does not belong to the US government.

The GDP does NOT secure repayment. The PROMISE to pay is what secures payment.

The US government's assets are made up from what they take in taxes and some land and gold reserves.

The rest of the nation's wealth is not available to pay interest or principle on the debt.

smaulgld says

It doesn't- the GDP does not belong to the US government.

It does if government revenue/taxes are tied to that economic activity, ALONG with the promise just like corporate profits are to their debt.

The difference between a corporate bond and a sovereign entity bond, like US Treasuries should be clear. The former is backed by a promise to pay and the financial assets of the company.

A sovereign bond is backed ONLY by a promise to pay. It's assets don't include the private wealth of the nation and are not pledged as collateral to the creditor in case of default.
If that was the case China in the event of default , China would own parts of certain states!

smaulgld says

The rest of the nation's wealth is not available to pay interest or principle
on the debt.

True, but that wealth is used to facilitate the private sector's operations/activities and the resulting GDP/economic activity.

upisdown says

No, after 42 attempts by the republican party to repeal a law without going through the normal legislative process, the republican party again tried to subvert the legislative process by throwing a temper tantrum and trying to tie the ability to pay the government debts and the accompanying process of paying for the already mandated operations of the government, together. It has nothing to do with ability, or even what, because of their own prior approvals of spending.

Stupid move by the republicans? YES, and they were willing to sink not only a big part of the economy, but the government as a whole as well. The republicans are 0-43 on their endeavors.

You can look at it with partisan eyes and I won't disagree that the Republican behavior did not help the national interest but one must also look at the words and actions of the President, the Treasury secretary and Democratic leaders who all claimed the US would default if the debt ceiling were not raised.

That is patently false-the US had enough money from tax revenues to pay the interest. They used the threat of default to try and win political points. In doing so they ALL unnecessarily unsettled our standing with our foreign creditors.

smaulgld says

The former is backed by a promise to pay and the financial assets of the
company.

A sovereign bond is backed ONLY by a promise to pay.

And that is exactly reflected in the return of buying the 2 debts. The corporate debt is obviously a much higher risk because of the risk of default/bankruptcy of the corporation, whereas the risk of bankruptcy or disolution of a country, specifically the USA is nil, and is reflected in the return.

Do you really think that Japan and China thought our country would not only default, but cease to exist as a country?

upisdown says

It does if government revenue/taxes are tied to that economic activity, ALONG with the promise just like corporate profits are to their debt.

It is correct that the governments assets are based on GDP but do not INCLUDE the GDP-just a portion of what they collect in taxes.

The assets of the government are the amount of dollars it has on hand based on the taxes it has collected and the taxes it anticipates to collect. Those are its assets not the entire GDP of the nation.

BTW- GDP is not an accurate measure of what the government might collect in taxes. Without going in to detail, just use this as an example-when we had negative GDP growth in 2009 and limited growth the past few years, the government still collected taxes. They didn't go negative on tax collection when GDP went negative.

Better to say the governments assets are only the amount of money it has in the treasury. EVEN so, if the US government decides not to pay, creditors have no legal recourse to that money

smaulgld says

You can look at it with partisan eyes and I won't disagree that the Republican
behavior did not help the national interest but one must also look at the words
and actions of the President,

The president doesn't make the budget or deliberate on it, but signs the final congressionally allowcated and approved budget. And, the squabble was based solely upon a law that was legitimately constructed, and passed the merits of constitutionality by the Supreme Court. It is now, as was then, a valid and legitimate law...........no ifs, ands, or buts. Well, at least to everybody except the teapublicans, and that is based on THEIR version of constituionality of the law.

upisdown says

True, but that wealth is used to facilitate the private sector's operations/activities and the resulting GDP/economic activity.

I disagree with that statement but it would be part of a seperate discussion.
The fact remains that the GDP of the country are not part of the government's assets and are clearly not pledged as collateral for the benefit of the buyers of US treasuries.

If the US defaults a bond holder doesn't have a claim on part of the US GDP

smaulgld says

It is correct that the governments assets are based on GDP but do not INCLUDE
the GDP-just a portion of what they collect in taxes.

The assets of the government are the amount of dollars it has on hand based
on the taxes it has collected and the taxes it anticipates to collect. Those are
its assets not the entire GDP of the nation.

I know, and that's what I meant. I apparently wasn't too good at explaining it.

Recap
If the US defaults on its obligations to pay interest or principal, there is nothing the bond holders can do to get repaid.

Their only recourse is not to buy any more of our bonds.

That would be ok from the US perspective except we need to keep borrowing so we need countries like china to keep holding, rolling over and buy our bonds.

Where we have a perverse advantage over the chinese in that we know that the Chinese know that in order to get paid back, we need to borrow more money.

One of the reasons China still buys newly issued US treasuries is to ensure they get paid back on their older US treasuries

smaulgld says

I disagree with that statement but it would be part of a seperate
discussion.

OK, will do, but some food for thought......Practically 90% of all money created is by the private banking sector(although it is an oligopoly) and the government helps facilitate that and legitimize it by laws and regulations.smaulgld says

The fact remains that the GDP of the country are not part of the government's
assets and are clearly not pledged as collateral for the benefit of the buyers
of US treasuries.

Agreed, although I never mean that but wasn't clear on the issue and might have alluded to that on accident.

smaulgld says

If the US defaults a bond holder doesn't have a claim on part of the US
GDP

True, here was my response.
It does if government revenue/taxes are tied to that economic activity, ALONG with the promise just like corporate profits are to their debt.

upisdown says

The president doesn't make the budget or deliberate on it, but signs the final congressionally allowcated and approved budget. And, the squabble was based solely upon a law that was legitimately constructed, and passed the merits of constitutionality by the Supreme Court. It is now, as was then, a valid and legitimate law...........no ifs, ands, or buts. Well, at least to everybody except the teapublicans, and that is based on THEIR version of constituionality of the law.

True the President does not make the budget. You are mistaken, however, with respect to the constitution that the teapublicans were obligated to fund obama care.

Putting aside, politics, political squabbling and tactics, The congress IS within its constitutional right not to fund any legislation.

If one congress passes a bill and the president signs it into law and it is challenged and the court upholds it, the next congress does NOT under the constitution have to fund it.

upisdown says

True, here was my response.

It does if government revenue/taxes are tied to that economic activity, ALONG with the promise just like corporate profits are to their debt.

Yes but the difference is the US bond holders have no recourse to a slice of the US economic activity if the US decides not to pay

smaulgld says

If the US defaults on its obligations to pay interest or principal, there is
nothing the bond holders can do to get repaid.

I agree.

smaulgld says

Their only recourse is not to buy any more of our bonds.

True, but that doesn't mean nobody else or another entitiy won't.

smaulgld says

That would be ok from the US perspective except we need to keep borrowing so
we need countries like china to keep holding, rolling over and buy our
bonds.

My same answer above applies to this statement.

smaulgld says

Where we have a perverse advantage over the chinese in that we know that the
Chinese know that in order to get paid back, we need to borrow more money.

But, ALL that "debt" is in our own currency, so exactly WHO is calling the shots? They are free to take their dollars and go home, but it IS nice that they use it to buy inflated or overpriced stuff from us.

smaulgld says

One of the reasons China still buys newly issued US treasuries is to ensure
they get paid back on their older US treasuries

True, but again, they could take the dollars and go. Whydon't they beyond the reason of getting paid back, then?

smaulgld says

Putting aside, politics, political squabbling and tactics, The congress IS
within its constitutional right not to fund any legislation.

I thought thatat least some of the funding(example:5% of the total) had to be allocated though if the law was passed, because the spending for it is in the law/tied to it.

smaulgld says

If one congress passes a bill and the president signs it into law and it is challenged and the court upholds it, the next congress does NOT under the constitution have to fund it.

Take a non contentious issue. Let's say legislation to repave the congressional parking lot was passed 435-0 in the house and 100-0 in the Senate and the President swiftly signed it. Let's say some citizens objected that our roads should be paved before the congressional parking lot and the case went to the supreme court.

The supreme court rules that the parking lot bill is constitutional and they have the right to pass such legislation.

Then a financial disaster happens (say China decides to no longer buy US treasuries). The next congress can decide within its constitutional power of the purse to NOT authorize funds to repave the parking lot on what ever basis its so decides- it thinks there are better uses for the money, it doesn't have the money, etc.

So despite it being the "law of the land" the congress doesn't have to fund the legislation

upisdown says

smaulgld says

Their only recourse is not to buy any more of our bonds.

True, but that doesn't mean nobody else or another entitiy won't.

Correct but any time an entity defaults you can count on new creditors demanding higher rates of interest in exchange for the default risk. That is what is at issue here- ALL branches of our government unwittingly spooked the credit markets by the public threat of default

FORTUNATELY, yields did not rise as the markets mostly saw through the charade that somehow there was going to be a default. However, that doesn't make it right that default was threatened

smaulgld says

Then a financial disaster happens (say China decides to no longer buy US
treasuries). The next congress can decide within its constitutional power of the
purse to NOT authorize funds to repave the parking lot on what ever basis its so
decides- it thinks there are better uses for the money, it doesn't have the
money, etc.

So despite it being the "law of the land" the congress doesn't have to fund
the legislation

But the funding of the mandate is IN the law(which it was), which would mean it has to be funded in part, but maybe not in whole. there's multiple ways that the ACA was funded, from taxes to tax credits, so I guess that only certain parts of it could be funded(the tax revenues) and other parts (tax credits) could be neglected by congress.

upisdown says

smaulgld says

That would be ok from the US perspective except we need to keep borrowing so

we need countries like china to keep holding, rolling over and buy our

bonds.

My same answer above applies to this statement.

Again my response is the same.Sure you can find someone else to buy the bonds, but can we find an entity that will be willing to buy as many and at the low rates we would rather pay

smaulgld says

threat

The key word.smaulgld says

FORTUNATELY, yields did not rise as the markets mostly saw through the
charade that somehow there was going to be a default. However, that doesn't make
it right that default was threatened

I totally agree.

smaulgld says

but can we find an entity that will be willing to buy as many and at the low
rates we would rather pay

True, but that's for the market to decide, right? Sorry, but the shenanigans DO have consequences, and maybe the teapublicans shouldn't have chosen that as a play-toy, or object of hatred. Or maybe those teapublicans should be run out of office for doing that, considering it's importance.

upisdown says

But, ALL that "debt" is in our own currency, so exactly WHO is calling the shots? They are free to take their dollars and go home, but it IS nice that they use it to buy inflated or overpriced stuff from us.

In a way its like mutually assured destruction.

If the chinese stop buying our bonds, we would have a hard time paying them back on their existing US treasury holdings and the value of their 1.3 trillion in holdings get devalued by a massive amount. So the Chinese continue to buy. BUT as I noted earlier, they are making arrangement to diversify away from the dollar and US treasures so they are not locked into buying our bonds

THAT is the big threat to us.

smaulgld says

If the chinese stop buying our bonds, we would have a hard time paying them back
on their existing US treasury holdings and the value of their 1.3 trillion in
holdings get devalued by a massive amount.

They'll just print more RMN to cover it.

DOOOOHHHHHHHH

upisdown says

But the funding of the mandate is IN the law(which it was), which would mean it has to be funded in part, but maybe not in whole. there's multiple ways that the ACA was funded, from taxes to tax credits, so I guess that only certain parts of it could be funded(the tax revenues) and other parts (tax credits) could be neglected by congress.

There is the rub!-Congress Can NOT obligate it self to future spending OR future spending cuts. Each congress (is supposed to!) create its own budget each year.

That is why it is a farce when they agree to cut spending in future years -it is non binding, just as a law TO spend money in the future is non binding.

smaulgld says

BUT as I noted earlier, they are making arrangement to diversify away from the
dollar and US treasures so they are not locked into buying our bonds

It's hard to believe that they haven't taken some money and went, instead of rolling over the debt endlessly. It's like a tenant owing us money and we just keep tacking that rent onto the end of the lease instead of them making small payments to us, because we would then have given them the (bigger)incentive to not pay at all.

smaulgld says

That is why it is a farce when they agree to cut spending in future years -it
is non binding, just as a law TO spend money in the future is non binding.

You do have to admit though, those congress f-ers have it made. It's like being a weatherman and saying there's a 50% chance of rain.