Financial Engineering the Debt Ceiling

The dumbest thing in economics, the US government’s debt ceiling, is clattering into relevance again. Basically the US Department of the Treasury has to pay the US government’s bills, and to do that it issues debt, and every time it issues new debt it adds a little to the total amount of debt outstanding, and eventually the debt outstanding reaches some arbitrary number called the “debt ceiling.” And then Treasury can’t issue any more debt, unless Congress raises the debt ceiling. Which it can easily do — it’s just an arbitrary number! — but Republicans in Congress keep threatening not to, and if that happens then the government can’t pay its bills and defaults on its obligations. Here is a recent speech from Assistant Secretary of the Treasury Joshua Frost with more detail on why the debt ceiling is dumb and why Congress should raise it.

But there is a real risk that Congress won’t, so today Bloomberg Opinion contributor Matt Yglesias has a Substack column arguing that Treasury should solve the problem of the debt ceiling using premium bonds. I think this is correct, I have made this argument a few times before, and Yglesias clearly explains why the debt ceiling is very dumb and why Treasury should, if need be, use gimmicks to solve it. And as gimmicks go, this one is fine. But his bond math is a little odd so I wanted to walk through a simplified version here.