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View Diary: Economic Populist: Consol Bonds are the Debt Ceiling Walk Off Home Run (27 comments)

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  •  The debt ceiling language in the diary (1+ / 0-)
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    wilderness voice

    references "principal". Principal can be actual or notional. This is no different than when the Treasury (or any issuer) creates bonds and then creates strips from that bond (separating the P and I components). Different investors can then buy the interest or the principal strip. If the Treasury retains the principal strip but sells the interest strip, there is still a liability created equal to either the notional balance or the sales price of the interest strip. This idea here has some semantic claims, but no accountant would agree that the issuer should not record a liability for the amount of the notional balance. So every accountant in America would say the Obama administration is trying to do something GAAP would not allow.

    •  Yes, and so? (2+ / 0-)
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      TheMomCat, priceman

      The legal question is not whether there is a notional value, but whether the notional value is included under the debt ceiling definition.

      It is not. The interest would be, since the interest is guaranteed, except the legal language does not include interest in the computation of total debt under the limit.

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      by BruceMcF on Fri Sep 27, 2013 at 06:19:44 AM PDT

      [ Parent ]

      •  The definition says the word "principal". (1+ / 0-)
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        wilderness voice

        Principal is NOT just an amount paid upon a maturity. It can be of a second form as well - notional principal. Notional principal is not actually paid, and has no maturity date. But it is indeed a form of principal, and is the number recorded as principal issued when an issuer sells perpetuals. You should not assume that the word "principal" in the debt ceiling language means only one of the two types of principal. That is not what Generally Accepted Accounting Principles says.

      •  I doubt that. (1+ / 0-)
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        wilderness voice

        I really don't think that the Treasury can issue bonds and then turn around and repudiate the principal.  That would violate the 14th amendment.  If they can't repudiate principal, then the bonds are guaranteed.

        •  What do you mean 'repudiate' the principle? (3+ / 0-)
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          limpidglass, TheMomCat, priceman

          If its a consol, the principle is not guaranteed. Indeed, if its defined payment consol, the principle is market determined: it is precisely the funds raised when it is sold at auction.

          Its a term of the series on original sale that the holder receives an ongoing series of interest payments, so nothing is repudiated. There's no practical reason to expect the interest payments to be repudiated ~ the British government still makes quarterly payments on its outstanding consol bonds.

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          by BruceMcF on Fri Sep 27, 2013 at 06:39:32 AM PDT

          [ Parent ]

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