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Obama's Conversion

by ChrisCook Sun Oct 13th, 2013 at 06:10:32 AM EST

Joseph Firestone is publishing a series of articles at New Economic Perspectives by way of a response to President Obama' cavalier treatment of suggested options for resolving the US debt ceiling crisis.

Part Two: Coins, the 14th and Consols

Apparently a commenter called Beowulf came up with the idea of Consols, so I thought I would weigh in with a comment, as this is a subject I aired on ET as long ago as August 2009 in the context of Iceland

I'm being a bit more radical by proposing a debt/equity swap on a US scale: Obama's Conversion.


Joe,

Credit to Beowulf for  suggesting Consols recently, but the use of Consols to create a National Equity is something I've been  publicly advocating for over 4 years in the UK (where of course they began, and still exist as an anachronism)

Debt Free or Date Free? What can we do with our National Debt?

Sovereign Equity can revolutionise financing of UK Assets

More recently in the context of solving Cyprus's € problems

The Case for Cypriot National Equity

I advocate Obama's Conversion, analogous to Goschen's Conversion of 1888 when UK Chancellor George Joachim Goschen converted and consolidated existing fragmented classes of stock into a single class of perpetual Consolidated Stock ("Consols").

A single class of US Consols could be issued and exchanged at a suitable price reflecting the tenor (date of redemption) and nominal rate of interest of all existing classes of US dated credit (mis-named as 'debt').

There would be a single market for a single instrument, and the question of default would disappear.  The rate of return would literally depend upon the rate at which of taxation is collected by the US government. The market price would depend upon supply and demand.

Obama's Conversion would literally be a debt/equity swap on a national scale, since undated 'stock' was the original form of funding which pre-dated a 300 year aberration into interest-bearing debt (Loan Stock) and  distinctly inequitable equity (Common Stock).

The ethical dimension of such a 21st century debt jubilee, could also be thought of as a conversion in more than one way.

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Obama was trained as a constitutional lawyer.  If push comes to shove he can invoke the 14th Amendment, specifically Section 4 of the Due Process Clause:

The validity of the public debt of the United States, authorized by law ...  shall not be questioned.

Invoking the 14th Amendment would inflame the TeaBaggers BUT it would probably be supported by the general public as well as the plutocrats.  

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Sun Oct 13th, 2013 at 01:59:17 PM EST
I would hope that this is what he would do - just on the day before default - at the least. Then he should claim: "The Tea Party made me do it!"

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Oct 13th, 2013 at 02:40:51 PM EST
[ Parent ]
But he could also do a conversion, as Chris suggests, or direct Jack Lew to begin re-issuance of maturing bonds as super-premium bonds which would sell at a corresponding premium over their redemption price. Or he could direct Lew and Bernanke to cancel out some of the $2trillion of US bonds the government owes to itself. That would just be balance sheet operations between the Treasury and the Fed. And he could do it in stages so as to just keep the wolf from the door and the pressure on the Republicans.

Were he to do a conversion he could reserve a large portion of these consols for retirees through banks with Fed accounts. It would piss off the primary dealers but might convert a lot of seniors into Democrats or independents. Then inform the primary dealers that it was financial sector members such as the Koch brothers that financed Heritage Action and stirred up this storm, that they did so through profits made in the financial sector, and if they don't like this they should see what they can to to convince bad actors to desist from stirring up shit storms.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Oct 13th, 2013 at 02:54:08 PM EST
[ Parent ]
If the GOP drags the country into default Obama will have to do something.  As a slightly Right-Centerist I suspect he will do the minimum to avert catastrophe.  Consols are too out of the mainstream for his economic advisers.  The $1 trillion coin is too weird for ditto.

His optimax solution is for the GOP to cave on the debt ceiling and the shutdown.  I don't seem them doing that, so it's up to Pelosi and whatever GOP House Reps she can dredge up to do the job.  My feeling is a GOP Rep voting to raise the debt ceiling will also be a vote to end the shutdown.  Once they vote for one there's no further downside to voting for the other.

Caveat: the above assumes rationality on the part of some GOP members.  With the pluts going berserk about the shutdown and threat to the derivatives markets I submit it's accurate-to-reality.

 

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Sun Oct 13th, 2013 at 03:05:33 PM EST
[ Parent ]
Alternatively, the default can be selective, targeted only at the Fed's holdings. Call it the non-default default.

It would kill some of the kabuki theater around monetization, and denude the Fed's "independence," but it would be functionally harmless. And since the ratings agencies are basically Pravda and Izvestia with a cheap paint job, they would probably roll over and declare the default to be a not-default, because it only happens within the consolidated government sector. That might provide sufficient plausible deniability to not unduly rock any boats that the Teabaggers' owners do not want rocked.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Oct 13th, 2013 at 04:17:12 PM EST
[ Parent ]
Alternatively, the default can be selective, targeted only at the Fed's holdings.

Unless Obama is in league with the Tea Party in this Kabuki why would it be advantageous to selectively default only on Fed holdings? That would only validate their rhetoric that defaults don't matter. It would seem better to just direct the Fed and Treasury to cancel bonds that the Fed holds. That would reduce the debt and give some room without an actual default. And the re-issuance of bonds at a super-premium could extend this indefinitely. Default off the table Obama could hold out on signing a bill, leaving the government shut down, until he got at least part of the sequester, preferably all of it, eliminated. Then tell the Tea Party that, if they want to change the laws, go out and win majorities in the House, Senate and take back the White House. The Republicans would be challenged just to hold the House after this recent string of events and their party would be a five alarm fire.  

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Oct 13th, 2013 at 04:37:45 PM EST
[ Parent ]
Unless Obama is in league with the Tea Party in this Kabuki why would it be advantageous to selectively default only on Fed holdings?

Because an across-the-board haircut would be an event of such magnitude as to shake the entire American trade system in its foundation. Not end it - that ultimately comes down to carrier task forces, and how the default is structured doesn't matter to that question. But shake it.

It would seem better to just direct the Fed and Treasury to cancel bonds that the Fed holds.

Better, but unfortunately illegal under present law.

And the re-issuance of bonds at a super-premium could extend this indefinitely. Default off the table Obama could hold out on signing a bill, leaving the government shut down, until he got at least part of the sequester, preferably all of it, eliminated. Then tell the Tea Party that, if they want to change the laws, go out and win majorities in the House, Senate and take back the White House. The Republicans would be challenged just to hold the House after this recent string of events and their party would be a five alarm fire.

And if the Dems had the requisite foresight, the populist instincts, courage of their convictions, and suitable convictions to begin with, then that is what would have happened a years ago during the first debt ceiling blackmail game.

But they don't, so it didn't.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Oct 13th, 2013 at 05:38:38 PM EST
[ Parent ]
How is it illegal for the US government to cancel bonds it issued that it currently holds?
if the Dems had the requisite foresight, the populist instincts, courage of their convictions, and suitable convictions. But they don't, so it didn't.

Far be it from me to defend the Obama Administration, but there is always the possibility that they have learned something since the last time and they have the fact of an existing shutdown that is grinding the Republicans to dust already in place. Issuing super-premiums now would take the threat of default off the table for the time being and get them to the 2014 election which they might fight on more favorable terms. But then Obama might again be faced with his nightmare scenario of having total control of House, Senate and Administration and having to prevent anything really progressive from happening.


As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Oct 13th, 2013 at 07:26:52 PM EST
[ Parent ]
The least "weird" would be 10 year premium notes with 100% coupon rates. After all, selling securities at par or discount to face value is just a Treasury rule, and even if the market punished them and bought them at 5% yield, $1,000 face value 100% coupon notes would have a value of $8,300, so rolling over $8,000 in maturing bills with 100% coupon 10yr note would reduce the debt ceiling by $7,000.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Tue Oct 15th, 2013 at 09:16:44 AM EST
[ Parent ]
The trillion dollar coin would be a myth slayer (regarding what money is or is not) that I don't think any society on this planet could handle without fairly disruptive consequences from both the elites and the everyday folks. It would also "confirm" what all the racists think about Obama - "look at this black guy who thinks he can just cheat his way out of debt."

you are the media you consume.

by MillMan (millguy at gmail) on Tue Oct 15th, 2013 at 09:17:01 PM EST
[ Parent ]
So there is a bunch of options, and yet Obama seems determined to face the House right on.

As I see it, it either comes down to forcing the republicans to take the heat for the consequences (either in terms of donors, public opinion or both) or laying the ground for a Great Betrayal. Speaking against the former is Obama the great compromiser who appears to never have seen a bipartisan compromise he did not like. Speaking against the latter is that the republicans are utterly untrustworthy and will come back for more and more and more, so even though Obama may want to use this to chop away at Social Security, he may not dare to.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Sun Oct 13th, 2013 at 03:11:32 PM EST
Whichever party chops away at Social Security will feel the voter's wrath at the next election.  Social Security is supported by 80%+ of Americans.  

The Republicans are taking the heat for the shutdown.  Most Americans are tired of their confrontational politics and their divorced-from-reality nonsense.  Whether that turns into Democratic candidate votes in November of 2014 is unknown.  

What can be said is the 2014 election environment (Fitness Landscape) is shaping against the GOP.  Voters 65 years old plus supported the GOP by +21 into 2010; that support has crumbled to +6.  Overall GOP favorables are at 28%, the lowest rating ever recorded by Gallup.  (I note Gallup is a "GOP Friendly" polling company.)  In fact the recent Gallup poll findings were called toxic for the GOP by a GOP pollster.

 

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Sun Oct 13th, 2013 at 03:29:31 PM EST
[ Parent ]
Problem is, the knuckle-draggers are fundamentally (and I'm using that word deliberately) hostile to democracy - or at least, to any democracy that isn't run by and for gun-toting trigger-happy angry white fascist menopausal males.

So a coup isn't out of the question. Especially if there's a seismic financial event.

It's impossible to exaggerate how much Obama enrages and terrifies the knuckle-dragger populist right - which unfortunately, after Bush, includes significant players in both senior and junior levels of the federal bureaucracy, the security services, and the armed forces.

Obama is playing a dangerously Weimar-ish game if he expects the knuckle-draggers to back down for rational or political reasons.

Neutering the GOP crazies would be a fantastic achievement. But it's not going to happen easily. And it could be a very, very close thing.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun Oct 13th, 2013 at 08:13:06 PM EST
[ Parent ]
I think that, after cancelling government held bonds and reissuance of maturing bonds at superpremium rates the next least radical step would be consols, as Chris suggests, and that this step could be handled so that it peeled away upscale seniors from the Republican Party by giving them something that was safe and that would, at the minimum, give them some income from their savings.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Oct 13th, 2013 at 04:43:29 PM EST
It seems to me that Obama has essentially won the battle over the debt ceiling, and barring the (not insignificant) possibility of a Republican leadership cock-up, the Republicans will raise the debt ceiling at least temporally for very little gain. They will even try to represent themselves as the "responsible party" for doing this.

The problem for Obama is that the longer the Government shutdown continues, the more real pain ordinary Americans will feel, and the more disillusioned they will become with all politics - always a plutocratic objective, as it will make the world safe for total corporate control.

Obama has very little leverage to force them to the table on this bar the toxic opinion polls, which mean almost nothing this far out from the election: the whole crisis can be re-spun by the right wing media machine in about three months of sustained anti-dem propaganda.

So the challenge for Obama is to mix and merge the two crises into one, making the Government shutdown and the debt default almost into the one and the same crisis which can only be solved by s combined clean Continuing resolution and debt ceiling increase. He can't very well "solve" the debt ceiling crisis by a purely "financially engineered" solution because that would totally undermine all his warnings that a debt default is a VERY BIG DEAL and almost the end of the world. The teabaggers who said it wasn't a big deal would be vindicated and the Presidents credibility fatally undermined.

So he may very well respond to an actual default by a combination of some of the solutions suggested here AND a series of dramatic and difficult to reverse Government cutbacks which he may well want for other reasons but which he could never publicly support and which would absolutely terrify the GOP and the plutocrats. Think:

  1. Delay in payment to all Government and military contractors - say from 30 days after invoice to 90 days. Cancelling some high profile and high cost/low utility programmes like F36 fighter.
  2. Accelerated withdrawal from Afghanistan and mothballing of some military bases in (say) Germany.
  3. Closure of some private sector prisons and paroling of many thousands of prisoners convicted of non-violent crimes or nearing the end of their sentences.
  4. Temporary end of military aid to Israel and curtailment of NSA programmes.

The great weakness of the Republican position is that the President ultimately has the power to decide how to prioritize spending in a post default world, and can do so in a way which maximises the damage to the Republican base and plutocratic supporters whilst protecting the Democratic base.

They can (and almost certainly will) try to impeach the President afterwards, but good luck with the trial in the Dem controlled Senate. Democratic unity will be sealed for a generation and it will be the GOP which will splinter into many parts.


Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Oct 14th, 2013 at 06:50:21 AM EST


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