Economic Populist: Consol Bonds are the Debt Ceiling Walk Off Home Run

The Debt Ceiling debate is Yet Another GOP Abuse of the System, but the entire debate runs under the pretense that the Treasury cannot sell new bonds if the Debt Ceiling is not raised.

Look at the history of the debt ceiling, and its easy to see where people get that idea. Way back when, the Treasury went to Congress for each and every new bond issue. Then in 1917, with war breaking out in Europe, Congress reformed the system to give the Treasury more freedom of action, establishing an overall ceiling within which it could issue bonds. It was like moving from a series of individually negotiated loans with a bank to obtaining an approved credit line with the bank.

From 1917 to 2010, the increase of the debt ceiling when required was a routine transaction. But after the radical reactionary wing of the Republican party ran under the successful "Tea Party" branding, a number of radical reactionary GOP Congressmen balked at this routine transaction, and took the full faith and credit of the US Government hostage. This resulted in the "sequester" debacle, in which spending cuts that were deliberately designed to punish the American people in case Congress could not agree on the insane policy of cutting spending in the middle of what is now a five year old Depression. Congress could not agree, and so the brain-dead punitive spending cuts were put in place instead.

After that experience, turning out as badly as progressive populist critics at the time said it would, now there are bold words from the White House demanding a clean debt ceiling vote, without any hostage taking.

The good news is that if the Treasury turns to Consol Bonds, they can win this fight no matter what the radical reactionary wing of the House Republicans decide to do.

What are Consol Bonds?

I have already describe Consol Bonds in detail in a previous essay in which I discussed a triple-play strategy of Consol Bonds, Jumbo Coins and appeal to the 14th Amendment. But in this shorter piece, I am just focusing on Consol Bonds, since really they can solve the basic problem all on their own.

I already knew what Consol Bonds were, before I ever learned that they could be used to avoid running into the debt ceiling. I learned of them while studying Economic History in grad school. Consol Bonds were "consolidate bonds" issued by the British in the mid-1700's. The conflict with France that included, in North America, the "French and Indian War" was the first war that the British fought that was financed using Consol bonds. Consol Bonds helped finance the establishment of Britain's Second Empire after the British were on the victorious side of the Napoleonic Wars.

Consol bonds were issued with a face value and coupon interest rate, but without a maturity date. This would be a "bug" for savings bonds, but for bonds held by financial institutions, this is actually a feature, since the rolling over of maturing bonds complicates things for bond-holding financial institutions.

If the Treasury wishes to retire Consol bonds, they simply buy them back.

How do Consol Bonds Fix The Debt Ceiling Problem

This is the part I did not know, until I stumbled across a reference to it and chased it down to the source in a comment at Corrente:

Another way to sidestep the debt ceiling is to go the opposite extreme from one-day maturities, issue perpetual T-bonds with no maturity date (what the Brits call consols). Look at the debt ceiling law, the public debt adds up, for all outstanding debt, the face amount of the guaranteed principal. The future interest payments to be paid aren't counted. ("The face amount of obligations issued under this chapter and the face amount of obligations whose principal and interest are guaranteed by the United States Government").

The key point: whose principle and interest are guaranteed by the United States Government. In a Consol bond, there is not guarantee by the US Government of the principle, because there is not maturity date, so there is never an obligation to pay the face value to anyone.

Its only tradition that places a face value on Consols at all. Instead of a face value and an interest rate, they could simply specify an annual yield, "$1,000, paid in $500 installments each March 1 and October 1", and you have a Consol Bond with an annual interest yield of $1,000. The Treasury Auction would decide the amount that is deposited in the Treasury Reserve Account ... just as the auction decides the same thing today with Ten Year Treasury Bonds.

What About When We Need a Maturing Bond?

Now, Consol Bonds were a British Tradition, from the mid-1700's through to the early 1900's. In the US, we have been using bonds with maturity dates since the founding of our Constitutional Republic. So there are likely to be a range of laws on the books that give details about bond issues, and the details include a guaranteed principle repayment on maturity.

For the medium term, however, this need can be met by consols. After all, the original point of the debt ceiling was to give the Treasury flexibility in terms of issuing and retiring specific series of Treasury Bonds. All that is required is to keep the total guaranteed principle face value of those bonds underneath the debt ceiling.

This can be done by issuing a series of consols, and using the revenues to retire existing bond issues. As the existing bonds are retired, that will free up space under the debt ceiling that can be used to issue new bonds with maturity debts, when the specifics of existing legislation requires that.

(And, yes, Jumbo Coins can be used for the same purpose, and probably with less transaction income tribute paid to Wall Street along the way, but this post is about Consols.)


The Treasury has hit the date for hitting the debt ceiling as October 17. And the continuing resolution to fund government operations expires on October 1, the start of the new fiscal year. So it makes sense to see what is going on with the government shutdown, and at least try to avoid a government shutdown if possible.

But the economic turmoil that will be caused by a government shutdown pales in comparison to the economic turmoil that will be caused by defaulting on US Government debt. So whether or not the government shuts down on October 1, when October 1 passes, the Treasury should be directed to prepare an issue of consols, to be used in the event that Congress refused to provide a clean vote on increasing the debt ceiling.

A prudent policy would also retain Jumbo Coins and appeal to the 14th amendment in the Treasury's back pocket. However, recourse to Consol bonds would allow finance of the government without requiring the debt ceiling to be increased. What is required is to prevent the radical reactionaries from rewriting the existing debt ceiling legislation to bring consols under the debt ceiling, and that can be accomplished with the existing Democratic Congressional delegation and the President's veto pen.

But the bottom line is that if the radical reactionaries of the House attempt another hostage crisis over the debt ceiling, they can choose whatever hostages they care to, and they can barricade the building. However, at present, they can't touch the Treasury's power to finance authorized and appropriated government spending with Consol bonds.





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