Companies buy back stocks and bonds all the time — so why not the U.S. government?
That’s the argument put forward by Dean Baker, the innovative and left-leaning economist at the Center for Economic and Policy Research, in a research note.
He says an overlooked debt reduction idea is buying back bonds at a discount in the future. “Long-term bonds that are issued at low interest rates will sell at substantial discounts to their face value if market interest rates rise,” he points out.
He puts forth the hypothetical idea of buying back debt in 2017. Using the assumptions provided by the Congressional Budget Office, the face value of the debt will be $3.86 trillion, but the projected market value will be $3.4 trillion — for a savings of $458 million. That $458 billion in savings will be slightly higher than the projected reduction in domestic or defense spending as a result of the sequester.
And Baker points out that the higher interest rates rise, the greater the savings, since the bonds would be cheaper.
It should be pointed out that Baker himself doesn’t actually attach much importance to debt reduction, decrying efforts here and abroad to reduce debt-to-GDP ratios. He notes that annual net interest payments on U.S. debt as a percentage of GDP is at historically low levels.
“However if people in policy positions continue to attach importance to this number then this sort of debt exchange should rank high on the list of policy options. There is no less costly way to eliminate close to half a trillion dollars in debt,” Baker says.
Baker’s plan probably has very little chance of being implemented. The Treasury has resisted far less ambitious efforts to take advantage of current low interest rates, say by issuing more bonds now to meet projected funding needs in the future.
– Steve Goldstein
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