The Latest Crazy Plan to Prevent a Debt Default—Turn the U.S. Into Greece*

*Well, except for the bailouts and debt restructuring part. Instead, the U.S. should issue banana republic bonds to stay under the debt ceiling.
Reuters

We need the perfect crazy idea to defuse the debt ceiling, once and for all. Something that hits the Goldilocks of crazy: not so much that the White House would never try it, but just enough that they wouldn't try it unless the alternative was default.

In other words, we need banana republic bonds.

What's the most fiscally irresponsible country you can think of? It's Greece, right? Yeah, it's Greece. Its cooked budget books, bailouts, and debt restructuring have made it a banana republic minus the actual bananas. Now, Republicans keep predicting that we'll turn into Greece any of one of these days, just keep waiting for it. And they're wrong. But we might need to turn into Greece, at least a little, to avoid defaulting on the debt if we don't lift the debt ceiling. It goes back to the budget chicanery bit.

See, Greece used accounting tricks to hide how much debt it really had for much of the last decade -- and so can we.

As far as accounting tricks go, this is about a 3 on a scale of 1 to 10 (with Enron at 10). As Twitter's Ivan the K (who you should be following) points out, the debt limit only applies to the face value of our bonds. So we just need to get investors to pay much, much more than face value to get the upfront cash we need to pay all our bills on time and stay under the debt ceiling. And we can do that if we sell a special kind of bond: a super-premium bond. We can call it a Constitution Bond, since it would help us uphold the 14th amendment and stay out of default. But the rest of the world would probably it a banana republic bond.

Let's try explaining this without getting too much into bond math. Remember, a bond is just a kind of loan. The government borrows a certain amount of money for a certain amount of time, and agrees to pay a certain amount every year (or half-year, etc.) before paying back all the principal at the end. Now, normally the government tries to borrow for as low an interest rate as possible. But if it were willing to borrow for a high initial interest rate, it could get more money upfront. Here's how. See, it's a bond's price, not its payments, that determine its interest rate. That's because its price can change, but its payments cannot. So if a bond has a high payment relative to its price -- that is, a high interest rate -- investors will pay more up front until the price is high enough that its interest rate is the same as others. Neat trick.

And it's a neat trick that could get us around the debt ceiling. Here's a little more math. The Congressional Budget Office says the deficit this year will be around $670 billion, which gives us an average monthly deficit of $56 billion. As Matt Levine of Bloomberg View points out in his excellent primer on super-premium bonds, there are roughly $100 billion of Treasury bonds maturing each month -- which means we would need to sell new ones with big enough coupons to turn that $100 billion of face value into $156 billion of actual value. Just how big would those coupons have to be? About 10.5 percent.

Presented by

Matthew O'Brien

Matthew O'Brien is a former senior associate editor at The Atlantic.

Never Tell People How Old They Look

Age discrimination affects us all. Who cares about youth? James Hamblin turns to his colleague Jeffrey Goldberg for advice.

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register.

blog comments powered by Disqus

Video

Never Tell People How Old They Look

Age discrimination affects us all. James Hamblin turns to a colleague for advice.

Video

Would You Live in a Treehouse?

A treehouse can be an ideal office space, vacation rental, and way of reconnecting with your youth.

Video

Pittsburgh: 'Better Than You Thought'

How Steel City became a bikeable, walkable paradise

Video

A Four-Dimensional Tour of Boston

In this groundbreaking video, time moves at multiple speeds within a single frame.

Video

Who Made Pop Music So Repetitive? You Did.

If pop music is too homogenous, that's because listeners want it that way.

More in Business

Just In