100-Year Bonds ?
Today’s WTF article is this clever funding idea, via former Treasury undersecretary (now at BlackRock) Peter Fisher: Issue 100-year bonds.
“If you issued a 100-year bond and had principal and interest pay down smoothly over the last 50 years, you create a great borrowing device for the Treasury that would let us move this hump of borrowing over the generational retirement that’s coming up,” Fisher, managing director and co-head of fixed income at BlackRock in New York, said in a Bloomberg Radio interview.
The Treasury last month tripled its estimate of planned debt sales in the final three months of the year to a record $550 billion as it attempts to fund bailouts for banks and fiscal stimulus programs to jump start economic growth. Treasury Secretary Henry Paulson told a conference in Washington Nov. 17 that the U.S. will issue some $1.5 trillion worth of Treasury securities in the fiscal year that began Oct. 1.
Fisher, Treasury undersecretary from August 2001 to October 2003, eliminated 30-year bond auctions in 2001 to reduce government borrowing costs after four years of federal budget surpluses. The U.S. hasn’t been in the black since. The government revived sales of the security in February 2006.
Treasury yields have plummeted as investors have flocked to the safety of U.S. government debt during the worst financial crisis since the Great Depression. Bonds rallied for a fourth day yesterday, sending yields on two-, 10- and 30-year debt to the lowest since the Treasury began regular sales of the securities.
That’s right — the idiot who eliminated the 30 year bond, just as the US entered its most irresponsible deficit creating spending spree in history, is now proposing the 100 year.
I am struck speechless.
>
Source:
Treasury Should Consider 100-Year Debt, BlackRock’s Fisher Says
Thomas R. Keene and Michael J. Moore
Bloomberg, Dec. 2 2008
http://www.bloomberg.com/apps/news?pid=20602007&sid=azGBEQQJhY24&
December 3rd, 2008 at 6:09 am
This kind of irresponsible thinking and criminal attitude toward any kind of future for this Country, our children and grand-children drives me crazy!! Every self-imposed crisis brings another cock-a-mamy solution. This is the kind of stupid shit that got us here in the first place!!
EVEN NOW…..THESE BASTARDS STILL DON’T GET IT!! QUIT KICKING THE CAN DOWN THE ROAD YOU SOBs!!
FAILING TO FACE REALITY NOW (~FINALLY) IS SIMPLY NO LONGER AN OPTION! DO THE RIGHT THING OR GO BLOW YOUR BRAINS OUT!!
–>(YOU)(MY)<– FUTURE!!
December 3rd, 2008 at 6:15 am
Seems a little harsh. Circumstances change and our thinking should change with it.
December 3rd, 2008 at 6:29 am
Seems like a nice deal for the Treasury, dumping mountains of forward risk onto the bond-holders, at a minimal cost, taking advantage of the current flight to quality(?) and locking in money with low rates. And spreading the debt financing over the next century makes a certain amount of sense — it beats defaulting on the debt or inflating our way out over the short haul.
OTOH, who would be clueless enough to put money into 100-yr Treasuries? Seems like a guaranteed way to lose money, as the bonds are almost 100% guaranteed to decline in value over the remainder of the purchaser’s life, with nobody being able to stick around to maturity. And collecting a miniscule interest all the while.
Perhaps they would serve as idiot flypaper. We seem to have a need for that. And from his tax returns, Dubya seems to like Treasuries. Maybe he would buy some.
December 3rd, 2008 at 6:35 am
How about 100 year mortgages? [lol]
December 3rd, 2008 at 6:57 am
I know that I shouldn’t be surprised by this stuff anymore, but it still shocks me when someone suggests pushing todays problem onto generations well into the future.
constantnormal:
I’m pretty sure that Disney did 100 year bonds in the 1990s. I imagine there is a sucker somewhere who would buy 100y T-Bonds.
December 3rd, 2008 at 7:03 am
They removed the 30 year to crush the long rate. Common Barry you know this.
~~~
BR:and how did that work out?
December 3rd, 2008 at 7:05 am
Great Britain. Perpetuities. We’re back to the seventies.
December 3rd, 2008 at 7:36 am
Great idea! The idea of bonds payable within a couple of years, a decade, or a lifetime are so old school. The Modern Conservative Republican Party was really behind the curve on this one. Better late than never, I suppose. Given their mantra ‘Live On Borrowed Money’ and the qualifier that you stick someone else with the bill, they should have figured this one out years ago.
This should be a godsend for those who want to recruit young members to replace the post geriatric crowd now in the majority.
You issue a 100 year bill, or maybe even a 250 year note (yes, ‘bill’ and ‘note’ … we are changing to a logarithmic time scale). Then your great great grand kids have to figure out how to push off repayment. You will be long gone and your kids will benefit from your foresight. Just think of how innovative it would be if interest were capitalized via new 250 year borrowings. God, why didn’t they think of this earlier. No wonder they lost in 2008. Losers.
December 3rd, 2008 at 8:00 am
this: “the idiot who eliminated the 30 year bond, just as the US entered its most irresponsible deficit creating spending spree in history, is now proposing the 100 year.”
says what needs to be known.
eliminating the 30-yr, from a Financial perspective, was an act of Crminal Negligence, at best.
“The principle of spending money to be paid by posterity, under the name of funding, is but swindling posterity on a large scale.”
“Honesty is the first chapter of the book of wisdom.”
both, above, of Thomas Jefferson
http://www.princeton.edu/~gcu/quotes.htm
December 3rd, 2008 at 8:39 am
With interest rates low, the government’s CFO should be issuing debt like a madman (poor word choice, I know.) If you have a 100-year liability go for it, though I don’t see that particular match to anything.
Laying out some twenties and thirties right now wouldn’t be such a bad idea. If the economy turns, all those equity investments will pay off big time and the Feds will be able to buy back their debt. If things get bad, having the long term debt will provide less roll over risk. Seems logical to me.
December 3rd, 2008 at 9:31 am
The only security anybody wants to own right now is U.S. Treasurys, so they are very well bid driving yields to near record lows reducing U.S. borrowing costs. Nobody expects the U.S. will ever retire its debt (doing so would create huge problems for pension funds, monetary policy, etc) so why not issue long maturity debt to lock in near record low rates and eliminate refinancing risk? What am I missing?
December 3rd, 2008 at 9:43 am
What am I missing?
that you are, explicitly, endorsing a Fraud.
December 3rd, 2008 at 9:53 am
Look at California for a model of what happens when you decide not to pay for services rendered and shift the payment responsibility to future generations. You can follow this in real time as the crisis is occurring in real time with no solution. This country did not become great by forcing our obligations on the next and suceeding generations.
December 3rd, 2008 at 10:01 am
Here’s an idea:
Instead handing out bailout monies, hand out indictments using the RICO statutes. Confiscate all the assets of the Wall Street gangsters to pay off the debts. Put a 20% surtax on all incomes over $500,000 to reduce the deficit.
December 3rd, 2008 at 10:04 am
I think the 1000 year would be better. By the time it matures, neither creditors nor debtor will be around.
December 3rd, 2008 at 10:23 am
we have such tranparency(like the visibility of the depths of the marianas trench) in the system and such a knack for forecasting the economic outlook (like a blind man walking though traffic on the LIE) that 100 year bonds make perfect sense.
December 3rd, 2008 at 10:33 am
@Mark E Hoffer: “You are, explicitly, endorsing fraud.”
But isn’t that just in keeping with what our markets and economy have become? Sorry to be so depressing but this is absurd. The answer to every problem is to devise new smoke and mirrors so that we don’t really have to deal with it now. “Party on now and let someone else deal with it” as become our mantra.
December 3rd, 2008 at 10:43 am
If these things were actually issued, who would buy them and why? Clearly, individuals have no use for a 100-year note, especially one that doesn’t start paying a coupon for 50 years. And even most institutions don’t continue for 100-years so they would have no practical use for them either. Lastly, anybody with even a passing familiarity with history knows that a lot can happen in 100 years– major political changes, wars, inflation, famine, etc.– so anybody who buys a product like this (regardless of the interest rate) is a complete moron. Caveat emptor if these things ever make it to market!
December 3rd, 2008 at 11:08 am
Insurance companies, endowments, and pension funds would buy these. Also, the maturity structure of the US government is too short, subjecting us to rollover risk. I think it is a good idea, much as I don’t like debt; if we have to borrow, lock in low funding costs.
http://alephblog.com/2008/11/25/issuing-debt-for-as-long-as-our-republic-will-last/
December 3rd, 2008 at 11:10 am
Locking-up money for 100 years @ ~ 3%?
Talk about “Return Free Risk”…
December 3rd, 2008 at 11:14 am
@carlwied: Unless I missed something in the article, it sounds more like they would pay interest only for the first 50 years, then recast (or whatever you’d call it for a bond) to fully amortizing. So I guess it’d be something like a 50/- IO loan? You’re right though, I can’t imagine anyone touching these.
December 3rd, 2008 at 11:55 am
Who would buy them? How about the same folks that buy most of our debt now; China, Japan etc.? Many already call them “morons” for buying so much of our debt; seemingly oblivious to currency risk. But unless they have a major change in policy, why would they stop?
December 3rd, 2008 at 12:20 pm
Treasury is wise in trying to lock in these low rates for 100 years, and we are not wise if we buy them at par.
December 3rd, 2008 at 12:39 pm
The 100-year CDO? Is this what we have become – a nation of Wall Street hucksters of debt?
December 3rd, 2008 at 12:48 pm
Here’s a better idea: institute a national lottery.
Upside: big-time revenue for the federal gov’t. accelerate reduction of the national debt.
Downside: reduced revenue for state gov’ts that currently have lotteries.
There are of course other issues around rev shares (fed/state), impact on the poor, how to administer. But there are always issues. And given the proposed increases in social spending on unemployment, healthcare, and presumably infrastructure-related gov’t jobs, a few of the concerns are somewhat mitigated.
Thoughts?
December 3rd, 2008 at 1:03 pm
I think a 50 or 100 or both is inevitable. We are entering a period when it will only be possible to pay interest on the debt. And much longer bonds will allow inflation to take care of most of the principal.
The handwriting appears to be on the wall: I think Ben is paving the way for longer bonds by announcing his intention to buy long Treasuries now, thus lowering long rates and allowing 50 or 100s to be sold at lower rates than would otherwise be possible.
Will it work? Probably, but the long rates still may need to be higher than they hope in order to get foreigners to buy the bonds.
December 3rd, 2008 at 1:13 pm
Even worse, foreigners could start demanding that US debt be denominated in their own currencies.
What’s that you say; that sort of thing only happens to third world ratholes?
December 3rd, 2008 at 1:26 pm
Great idea.
Let me short them.
December 3rd, 2008 at 1:36 pm
I guess this was inevitable. The states got the numbers racket, native Americans got gambling, and the U.S. protection racket and drug money isn’t what it used to be….so it was only a matter of time before one of the families brought up the idea of counterfeiting…..
December 3rd, 2008 at 3:54 pm
I like the idea of the lottery. Maybe have one in the same way as the movie The Island. Where the lottery is actually a con, and the winner gets to be chopped up into little pieces and sold for body parts to the person that had insurance for major accidents.
It’s a brilliant idea and really embodies all aspects of the current crisis.
December 3rd, 2008 at 6:05 pm
cielosan – ah yes. excellent ideas. we should also offer Credit Default Swaps on the winner.
December 3rd, 2008 at 6:06 pm
oops, i think you had already alluded to that.
December 3rd, 2008 at 6:44 pm
National lottery sounds good. “A tax on stupidity” as my wife calls lotteries. It would be a tax we wouldn’t have to pay. Think Kudlow would play?
December 3rd, 2008 at 7:38 pm
Fisher doesn’t understand monetary operations or reserve accounting. His “locking in a rate” idea is inapplicable to the way the government spends.
The government spends by crediting bank accounts. The spending occurs before the sale of securities or the collection of taxes and results in an increase in reserves in the system. The sale of securities functions as a reserve maintenance operation and is done solely to sustain the Fed’s interest rate target. There is no “borrowing” per se.
Interest rates are set by the Fed–period. It targets the overnight lending rate but has the prerogotive to directly set rates along the entire term structure if it wishes.
The notion that the Treasury is selling securities to “fund” the bailouts is wrong. The Treasury is not “funding” anything. It spends by crediting bank accounts. Over the past two months actions taken by the Treasury and Fed have caused bank reserves to swell by $600 billion. The planned sale of $550 billion will simply reduce reserve balances. The public swaps a reserve balance (cash) for a higher paying Treasury security. The net financial position of the public has not changed.
Since the government spends by crediting bank accounts and doesn’t borrow per se, it needs to sell nothing more than the shortest term T-Bills to effectively manage reserves. The only reason the Treasury sells longer dated securities is because various maturity lengths are demanded by portfolio investors. It is simply satisfying that demand, but doesn’t have to. It has nothing to do with the need to lower borrowing costs because it doesn’t borrow.
Yields have plummeted recently because actions by the Treasury and the Fed boosted reserves by an historic amount. In other words the government provided the funds–in historic quantity–with which to buy the securities. It’s simple supply and demand: the Fed and Treasury have provided an enormous amount of money to the system, but the securities are being sold in relatively small amounts at intervals.
The Fed’s decision to buy longer term securities stems from a desire to set long term rates lower. It sets long term rates in the same fashion that it sets the overnight rate–by buying or selling securities from the public. This is being done on the assumption that it will lead to more credit demand. It may not work. It didn’t work in Japan. A boost in aggregate demand is what is really needed now. The Fed does not control that, but the Federal Government certainly can.
Using the example of Disney and its sale of long-term bonds is like comparing apples to oranges. Disney is not the Federal Gov’t. They DO need to borrow and their borrowing costs matter. It’s not the same for the government. Bad analogy and misses a critical, yet fundamental, distinction.
Again, the only reason the government sells anything other than the shortest dated T-Bill is to satisfy the demand of portfolio investors. Aside from that, it doesn’t need to.
December 3rd, 2008 at 10:53 pm
mikeydoggy,
nice post, it’s refreshing to see, so simply spelled out, how things actually work.
People, if they’re paying attention, would do well by warming up the spooler, and hitting
A nice turn you’ve done.
December 3rd, 2008 at 10:54 pm
hitting /print/
December 4th, 2008 at 10:31 am
Let’s see. If the GOVERNMENT issued 100 year bonds in December 1908, and they matured today, what would happen?