Convertible Indexed Consols - Revision history

Rasmusen p1vaim at 05:12, 27 January 2021

2021-01-27T05:12:58Z

Rasmusen p1vaim at 17:54, 24 January 2021

2021-01-24T17:54:44Z

Rasmusen p1vaim at 14:46, 24 January 2021

2021-01-24T14:46:14Z

Rasmusen p1vaim at 14:25, 24 January 2021

2021-01-24T14:25:33Z

Rasmusen p1vaim: Created page with "'''Consols.''' Low transaction costs and safe nominal flow. '''Indexed.'' Safe real flow. We could index them to different consumption bundles, and even account for inter..."

2021-01-23T16:03:39Z

Created page with "'''Consols.''' Low transaction costs and safe nominal flow. '''Indexed.'' Safe real flow. We could index them to different consumption bundles, and even account for inter..."

New page

'''Consols.''' Low transaction costs and safe nominal flow.

'''Indexed.'' Safe real flow.

We could index them to different consumption bundles, and even account for international differences.

'''Convertible.''' There is still one big risk with the indexed consols: the risk that the government will rig the index. If the index used is the CPI or the GDP deflator, that index is defined by an agency of the U.S. government, the same government you are lending to. What is to stop the government from solving its debt service problem by telling the agency to change the index formula so that the CPI rise this year is not 15%, which when added to the base of 1% makes the consol yield 16% this year, but 0%, or even -5%, so the consol yields 0% this year? Since the asset in question is a consol, this does more than solve the debt service problem: it solves the debt problem completely. Once the nominal interest is reduced to zero, that does the job, since there is never any principle to repay.

The solution is to make the consol convertible. It must include a clause saying that the holder may, at his option, convert a $1,000 indexed consol into a $1,000 unindexed consol. I'll have to figure out how this would work, though.

← Older revision		Revision as of 05:12, 27 January 2021
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−	~~[[Thinking in terms of models~~, ~~and conditional statements generally]]~~	+	Call abel bonds, for indexed bond artile. This would be bad in a debt crisis. Should there be bond covenants for government bonds?
−
−	~~Models are conditional statements: If the Assumptions are true, Then the Conclusions are true~~. ~~Thus, we need to start by thinking about conditional statements. Most people have~~ a ~~lot of trouble with them~~.

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 The solution is to make the consol convertible.  It must include a clause saying that the holder may, at his option, convert a $1,000 indexed consol into a $1,000 unindexed consol--- an escape hatch.
-'''Situation (1).''' The government  has issued a  $1,000 indexed consol paying 2% plus  the CPI, and also issues unindexed consols each day at whatever interest rate makes the consol sell for $1,000 that day. Suppose that interest rate is 2% forever; the real interest rate never changes.  You own the indexed consol. We make it convertible, so you can trade it in any day for one of the freshly issued unindexed consols. Will this work?
+'''Situation (1).''' Each day, the government  issues a  $1,000 indexed consol paying 2% plus  the CPI, and also  unindexed consols  at whatever interest rate makes the consol sell for $1,000 that day. Suppose that interest rate is 2% forever; the real interest rate never changes.  You own an indexed consol you bought ten years ago. We make it convertible, so you can trade it in any day for one of the freshly issued unindexed consols. Will this work?
+This will solve the problem of the government extremely abusing the CPI, because you will  convert if they try that.  But will you convert even if they don't abuse the CPI, because chance can cause the unindexed consol to have a higher market value?

@@ Line 9: / Line 9: @@
 The solution is to make the consol convertible.  It must include a clause saying that the holder may, at his option, convert a $1,000 indexed consol into a $1,000 unindexed consol--- an escape hatch.
-Suppose the government  has issued a  $1,000 consol paying 2% plus  the CPI, and also issues unindexed consols each day at whatever interest rate makes the consol sell for $1,000 that day   (we can relax this assumption later).
+'''Situation (1).''' The government  has issued a  $1,000 indexed consol paying 2% plus  the CPI, and also issues unindexed consols each day at whatever interest rate makes the consol sell for $1,000 that day. Suppose that interest rate is 2% forever; the real interest rate never changes.  You own the indexed consol. We make it convertible, so you can trade it in any day for one of the freshly issued unindexed consols. Will this work?
 [[Thinking in terms of models, and conditional statements generally]]
 Models are conditional statements: If the Assumptions are true, Then the Conclusions are true. Thus, we need to start by thinking about conditional statements. Most people have a lot of trouble with them.

@@ Line 1: / Line 1: @@
 '''Consols.'''  Low transaction costs and safe nominal flow.
-'''Indexed.'' Safe real flow.
+'''Indexed.''' Safe real flow.
 We could index them to different consumption bundles, and even account for international differences.
@@ Line 7: / Line 7: @@
 '''Convertible.''' There is still one big risk with the indexed consols: the risk that the government will rig the index. If the index used is the CPI or the GDP deflator, that index is defined by an agency of the U.S. government, the same government you are lending to. What is to stop the government from solving its debt service problem by telling the agency to change the index formula so that the CPI rise this year is not 15%, which when added to the base of 1% makes the consol yield 16% this year, but 0%, or even -5%, so the consol yields 0% this year?  Since the asset in question is a consol, this does more than solve the debt service problem: it solves the debt problem completely. Once the nominal interest is reduced to zero, that does the job, since there is never any principle to repay.
-The solution is to make the consol convertible.  It must include a clause saying that the holder may, at his option, convert a $1,000 indexed consol into a $1,000 unindexed consol. I'll have to figure out how this would work, though.
+The solution is to make the consol convertible.  It must include a clause saying that the holder may, at his option, convert a $1,000 indexed consol into a $1,000 unindexed consol--- an escape hatch.