OK

This is only a Preview!

You must Publish this diary to make this visible to the public,
or click 'Edit Diary' to make further changes first.

Posting a Diary Entry

Daily Kos welcomes blog articles from readers, known as diaries. The Intro section to a diary should be about three paragraphs long, and is required. The body section is optional, as is the poll, which can have 1 to 15 choices. Descriptive tags are also required to help others find your diary by subject; please don't use "cute" tags.

When you're ready, scroll down below the tags and click Save & Preview. You can edit your diary after it's published by clicking Edit Diary. Polls cannot be edited once they are published.

If this is your first time creating a Diary since the Ajax upgrade, before you enter any text below, please press Ctrl-F5 and then hold down the Shift Key and press your browser's Reload button to refresh its cache with the new script files.

ATTENTION: READ THE RULES.

  1. One diary daily maximum.
  2. Substantive diaries only. If you don't have at least three solid, original paragraphs, you should probably post a comment in an Open Thread.
  3. No repetitive diaries. Take a moment to ensure your topic hasn't been blogged (you can search for Stories and Diaries that already cover this topic), though fresh original analysis is always welcome.
  4. Use the "Body" textbox if your diary entry is longer than three paragraphs.
  5. Any images in your posts must be hosted by an approved image hosting service (one of: imageshack.us, photobucket.com, flickr.com, smugmug.com, allyoucanupload.com, picturetrail.com, mac.com, webshots.com, editgrid.com).
  6. Copying and pasting entire copyrighted works is prohibited. If you do quote something, keep it brief, always provide a link to the original source, and use the <blockquote> tags to clearly identify the quoted material. Violating this rule is grounds for immediate banning.
  7. Be civil. Do not "call out" other users by name in diary titles. Do not use profanity in diary titles. Don't write diaries whose main purpose is to deliberately inflame.
For the complete list of DailyKos diary guidelines, please click here.

Please begin with an informative title:

I recently discussed an alternative to Consol Bonds

Now, I was addressing a proposal by Matt Lavine at Bloomberg, and as a result, the explanation was not necessarily the simplest possible explanation. So here, I'm looking at just my proposed 10 year 100% coupon note, and going through the nuts and bolts.

Intro

You must enter an Intro for your Diary Entry between 300 and 1150 characters long (that's approximately 50-175 words without any html or formatting markup).

Public Finance Nuts & Bolts

Every month over $93b in Treasury securities mature ~ about $120b in November. Paying these off when the budget is in deficit requires issuing new Treasury securities, which is called "rolling over" the securities. It normally doesn't have much impact on the debt ceiling, since the old securities are taken out of the debt ceiling, and the new ones adds to the debt ceiling. So we are used to the debt ceiling being "about" financing the new monthly government deficit.

However, suppose the Treasury sells a $1,000 note that matures in 10 years and that pays its face value as interest every year.

At the moment, the longest term market rate for Treasury Securities is about 4%.

Just to be on the safe side, suppose that the market demands an effective interest rate of 5% on these notes. That $1,000 Premium Note is worth about $8,300 at a "market yield" of 5%.

So the Treasury can pay for $93b worth of maturing Treasury Securities by selling $93b worth of Premium Notes with a face value of $11.2b.

That rolls the debt ceiling count backward by about $80b.

And $80b face value of Premium Note would sell in the market for over $600b, which is substantially more than the monthly deficit.

So the space on the debt ceiling that is opened up by paying maturing Treasury Securities with Premium Notes would be more than enough to allow enough additional Premium Notes to be sold to cover the monthly deficit.

So no default.

So that's the Nuts and Bolts how the Premium Notes work

 
Credit where Credit is Due

I want to note that the Consols concept is due to beowolf, who also brought the option of Platinum Coins to our attention, and I ran across the Premium Bond concept in Matt Levine's piece.

Extended (Optional)

EMAIL TO A FRIEND X
Your Email has been sent.