Jordan D. Weisinger
165 Morewood Ave
Pittsburgh, PA 15521
201-747-7381
Octopus.Economics@Gmail.com
**Asset Backed Treasuries**
A negative borrowing rate is one where a fixed liability for borrowing is less than the average inflation rate allowing principal erosion to occur at a rate significant enough to dampen the negative consequences of debt accumulation. With treasury interest rates lower than inflation the nation can expect the difference to accumulate over decades resulting in stable debt reduction. A state could leverage a negative borrowing rate by borrowing twice as much needed and investing the difference in private securities earning a higher rate than the obligation. As long as the collateral earns twice as the obligation originally owed the leverage will be able to pay off the original interest owed and the interest owed on subsequent debt. It would never need to earn a return greater than sum of both obligations if a negative borrowing rate was available: the differential between inflation and obligations will produce principle loss and substantially benefit the state. Any earnings above twice the obligation rate would aid in debt reduction in the same terms as inflation over a given period.
If twenty billion was borrowed at a rate of 2% for a 10 billion project during a 10 year 3% inflationary period when the10 billion remaining is invested in private securities should produce at least a 4% return compensating for the entire obligation with the expected principle erosion reducing 10% of the total cost of the expenditure every 10 years. During the 10 year period the nation could avoid all interest payments with the leverage and at the end of the period the collateral can be sold eliminating one half of the obligation on the bond maturity date. The nation would have to repay the original obligation less the principle erosion and the spread between the return of the 10B leveraged and the 4% obligations. Even if the program only earned 4% returns (twice the original obligation) it would still provide 3x as much principal erosion; an inflation rate of 3% offset with 0% interest equals approximately 34% of principal erosion over a 10 year period (68% in 20 years and 100% in 30 years). Average returns on private securities are typically 7% with an adequately diversified portfolio. Over 10 years a 3.0% surplus in investment returns would contribute to roughly 34% (1.03^10) of the original principle owed. With the entire obligation offset principle erosion attributed to the inflation rate of 3% will equal 34% over the same 10 year period (1.03^10). The combination of the two accounts for a gain roughly equivalent to 68% (34%+34%) the original principle over the same 10 years in exchange for only a modest increase in systemic risk.
This is an oversimplification and the values are off but the process is sound. The real returns on treasuries were understated purposefully to highlight the trend in whole integers rather than smaller but more accurate values. For all intents and purposes the term principle erosion consider the net plus borrowed value rather than the simple inflation adjusted value. If 10 billion is borrowed at 2% after 10 years of 3% inflation the principle would be reduced by 34% but in practice the 2% interest payments are not repaid with tax revenue but rather accumulate in new borrowing. This permits principle erosion to be calculated by inflation less interest to accommodate the difference in value simultaneously as the accumulation of new debt. Unless interest payments are immediately compensated for by increased taxes the mechanism should include both operations so that a more accurate depiction of inflations effect on total debt and debt servicing is earned.
The Federal government can engage in a program that collateralizes its treasuries with state or city bonds in order to create a long term source of revenue for itself or to assist the states in managing their accumulated bond obligations. A collateralization process is an opportunity transfer the advantages of negative borrowing to the states for improved economic stimulus and financial security. Federal Treasuries deal in volumes of debt much larger than the combined deficits of the state governments which means it could easily designate a rate to paid to the state or region far less than the price the market economy will arrive at for consumption of that bond. The same amount money is invested more freely to the federal government at lower rates and can be easily returned to the states through a chartered program for income and liability redistribution. Most state deficits amount to a few billion dollars. Not to underestimate the combined tally of deficit moneys (State = 4T versus Fed =16, for U.S. example) on the state tier but most state bond markets could easily be assumed by the federal government if targeted one state or region at a time within the scope of a bail out, remediation, or economic stimulus program.
Ten Billion borrowed at 2% with five billion invested at 4% frees five billion for use in economic stimulus with no interest payments owed on the amount prior to bond maturity and principal repayment. A return of 4% is a floor with returns averaging 5.5%; one and a half percent is in excess of the total 4% in obligations results in 16% (1.015^10) of principal reduction over a 10 year period. The spread of 1.5% combined with an average inflation rate of 3% for approximately 50% in principal erosion during periods of zero interest payments. Thirty four percent plus sixteen percent equals 50% of the original principle. The remainder equals about 2.5 billion of the 5 billion in unsecured loans. Two and a half billion of the original 5.0 billion will be eliminated for the 10 year bond call after the 5 billion initially invested is liquidated for repayment of the original 10 billion borrowed. This would permit a state to borrow four times as much with no increase in bond liability payments. Conversely, if only twice the normal amount was borrowed it would result in accruing only half the usual amount of debt servicing payments. Systemic risk is increased with borrowing doubling but half will be secured with collateral in state government bond assets and private securities. Nations with negative borrowing rates typically attempt to borrow at the inflation rate to maximize economic stimulus without producing long term drag and this method will double the allowable figure. During periods of emergency the collateral can be leveraged up for access to larger incomes and even greater economic stimulus.
The increased consumption of bond should drive down state and city average rates from 5% to 4% granting them an immediate 25% reduction in obligations and access to a 4% to 7% spread on assets for enhanced principal erosion when using securities as collateral. Private securities average a return of 7% producing the 4% needed to offset the original 4% bond liability with a surplus of 3% depreciating the 4% owed on the second liability. Although enhanced principle erosion isn’t earned with returns less than 9% the state level jurisdictions do secure themselves an arrangement replicating negative borrowing rates. The leveraged obligation should equal only 1% or 2% after offsetting earnings. This rate will typically be much lower than inflation during normal economic conditions. State governments would gain principal reductions of 30% or more (per 10 year period) with interest payments at the stipulated 1% rate. Returns beyond 9% on private securities erase all interest payments and contribute a 10% or 20% increase in principal erosion during 10 year periods. The alternative is forcing states to continue borrowing at a rate higher than inflation resulting in principal growth averaging 1-2% a year or 10-20% over a 10 year period.
Most nations with negative borrowing rates attempt to borrow at a rate equal to the inflation rate to maximize GDP growth. The premise being the inflation rate negates many of the long-term consequences of the borrowing. Collateralizing federal bonds with state bonds moves the target from 3% GDP to 6% GDP. The Federal tier can borrow with no interest payments and earn between 50% to 68% in principal erosion over a 10 year period. The states and cities gain access to much lower rates and faster principal erosion: stimulates negative borrowing rate enjoyed by Federal tiers. There is an increase in Systemic Risk and moral hazard with the values ballooning to twice the previous proportion. Despite the state accumulating twice the normal amount of sovereign debt half is collateralized with tax back bonds from state and city governments. The unsecured debt:GDP ratio will remain the same although there will be abridged debt servicing payments. The advent of this program does not alter the calculus of political argument over tax breaks versus increased spending but it can mitigate the long term consequences of the borrowing and economic stimulus.
Sincerely,
Jordan Weisinger
If any of my current or previous essays are useful I would appreciate correspondence on Congressional letterhead citing the title of the essay. I take exceptional pride in any unique responses and my wall is already adorned with framed letters from **U.S. NJ Rep. Rothman**, **3-4 other Senators and Representatives, **for my various essays or manuscripts (i.e Sovereign Power book series, the Sovereign Debt Crisis, and my Sovereign Wealth book series).
Jordan D. Weisinger
165 Morewood Ave
Pittsburgh, PA 15521
201-747-7381
Octopus.Economics@Gmail.com
Representative Mike Doyle
2637 East Carson Street
Pittsburgh, PA 15203
7/18/2013
**Asset Backed Treasuries**
A negative borrowing rate is one where a fixed liability for borrowing is less than the average inflation rate allowing principal erosion to occur at a rate significant enough to dampen the negative consequences of debt accumulation. With treasury interest rates lower than inflation the nation can expect the difference to accumulate over decades resulting in stable debt reduction. A state could leverage a negative borrowing rate by borrowing twice as much needed and investing the difference in private securities earning a higher rate than the obligation. As long as the collateral earns twice as the obligation originally owed the leverage will be able to pay off the original interest owed and the interest owed on subsequent debt. It would never need to earn a return greater than sum of both obligations if a negative borrowing rate was available: the differential between inflation and obligations will produce principle loss and substantially benefit the state. Any earnings above twice the obligation rate would aid in debt reduction in the same terms as inflation over a given period.
If twenty billion was borrowed at a rate of 2% for a 10 billion project during a 10 year 3% inflationary period when the10 billion remaining is invested in private securities should produce at least a 4% return compensating for the entire obligation with the expected principle erosion reducing 10% of the total cost of the expenditure every 10 years. During the 10 year period the nation could avoid all interest payments with the leverage and at the end of the period the collateral can be sold eliminating one half of the obligation on the bond maturity date. The nation would have to repay the original obligation less the principle erosion and the spread between the return of the 10B leveraged and the 4% obligations. Even if the program only earned 4% returns (twice the original obligation) it would still provide 3x as much principal erosion; an inflation rate of 3% offset with 0% interest equals approximately 34% of principal erosion over a 10 year period (68% in 20 years and 100% in 30 years). Average returns on private securities are typically 7% with an adequately diversified portfolio. Over 10 years a 3.0% surplus in investment returns would contribute to roughly 34% (1.03^10) of the original principle owed. With the entire obligation offset principle erosion attributed to the inflation rate of 3% will equal 34% over the same 10 year period (1.03^10). The combination of the two accounts for a gain roughly equivalent to 68% (34%+34%) the original principle over the same 10 years in exchange for only a modest increase in systemic risk.
This is an oversimplification and the values are off but the process is sound. The real returns on treasuries were understated purposefully to highlight the trend in whole integers rather than smaller but more accurate values. For all intents and purposes the term principle erosion consider the net plus borrowed value rather than the simple inflation adjusted value. If 10 billion is borrowed at 2% after 10 years of 3% inflation the principle would be reduced by 34% but in practice the 2% interest payments are not repaid with tax revenue but rather accumulate in new borrowing. This permits principle erosion to be calculated by inflation less interest to accommodate the difference in value simultaneously as the accumulation of new debt. Unless interest payments are immediately compensated for by increased taxes the mechanism should include both operations so that a more accurate depiction of inflations effect on total debt and debt servicing is earned.
The Federal government can engage in a program that collateralizes its treasuries with state or city bonds in order to create a long term source of revenue for itself or to assist the states in managing their accumulated bond obligations. A collateralization process is an opportunity transfer the advantages of negative borrowing to the states for improved economic stimulus and financial security. Federal Treasuries deal in volumes of debt much larger than the combined deficits of the state governments which means it could easily designate a rate to paid to the state or region far less than the price the market economy will arrive at for consumption of that bond. The same amount money is invested more freely to the federal government at lower rates and can be easily returned to the states through a chartered program for income and liability redistribution. Most state deficits amount to a few billion dollars. Not to underestimate the combined tally of deficit moneys (State = 4T versus Fed =16, for U.S. example) on the state tier but most state bond markets could easily be assumed by the federal government if targeted one state or region at a time within the scope of a bail out, remediation, or economic stimulus program.
Ten Billion borrowed at 2% with five billion invested at 4% frees five billion for use in economic stimulus with no interest payments owed on the amount prior to bond maturity and principal repayment. A return of 4% is a floor with returns averaging 5.5%; one and a half percent is in excess of the total 4% in obligations results in 16% (1.015^10) of principal reduction over a 10 year period. The spread of 1.5% combined with an average inflation rate of 3% for approximately 50% in principal erosion during periods of zero interest payments. Thirty four percent plus sixteen percent equals 50% of the original principle. The remainder equals about 2.5 billion of the 5 billion in unsecured loans. Two and a half billion of the original 5.0 billion will be eliminated for the 10 year bond call after the 5 billion initially invested is liquidated for repayment of the original 10 billion borrowed. This would permit a state to borrow four times as much with no increase in bond liability payments. Conversely, if only twice the normal amount was borrowed it would result in accruing only half the usual amount of debt servicing payments. Systemic risk is increased with borrowing doubling but half will be secured with collateral in state government bond assets and private securities. Nations with negative borrowing rates typically attempt to borrow at the inflation rate to maximize economic stimulus without producing long term drag and this method will double the allowable figure. During periods of emergency the collateral can be leveraged up for access to larger incomes and even greater economic stimulus.
The increased consumption of bond should drive down state and city average rates from 5% to 4% granting them an immediate 25% reduction in obligations and access to a 4% to 7% spread on assets for enhanced principal erosion when using securities as collateral. Private securities average a return of 7% producing the 4% needed to offset the original 4% bond liability with a surplus of 3% depreciating the 4% owed on the second liability. Although enhanced principle erosion isn’t earned with returns less than 9% the state level jurisdictions do secure themselves an arrangement replicating negative borrowing rates. The leveraged obligation should equal only 1% or 2% after offsetting earnings. This rate will typically be much lower than inflation during normal economic conditions. State governments would gain principal reductions of 30% or more (per 10 year period) with interest payments at the stipulated 1% rate. Returns beyond 9% on private securities erase all interest payments and contribute a 10% or 20% increase in principal erosion during 10 year periods. The alternative is forcing states to continue borrowing at a rate higher than inflation resulting in principal growth averaging 1-2% a year or 10-20% over a 10 year period.
Most nations with negative borrowing rates attempt to borrow at a rate equal to the inflation rate to maximize GDP growth. The premise being the inflation rate negates many of the long-term consequences of the borrowing. Collateralizing federal bonds with state bonds moves the target from 3% GDP to 6% GDP. The Federal tier can borrow with no interest payments and earn between 50% to 68% in principal erosion over a 10 year period. The states and cities gain access to much lower rates and faster principal erosion: stimulates negative borrowing rate enjoyed by Federal tiers. There is an increase in Systemic Risk and moral hazard with the values ballooning to twice the previous proportion. Despite the state accumulating twice the normal amount of sovereign debt half is collateralized with tax back bonds from state and city governments. The unsecured debt:GDP ratio will remain the same although there will be abridged debt servicing payments. The advent of this program does not alter the calculus of political argument over tax breaks versus increased spending but it can mitigate the long term consequences of the borrowing and economic stimulus.
Sincerely,
Jordan Weisinger
If any of my current or previous essays are useful I would appreciate correspondence on Congressional letterhead citing the title of the essay **which I can submit with my application to graduate programs **(for example, MPP/MPA or PHD in Political Science)** I would like to attend in 2014 after I complete my current MBA education.** It would be a significant benefit of me to present my application with letterhead citing the title of the essays previously distributed. I take exceptional pride in any unique responses and my wall is already adorned with framed letters from **U.S. NJ Rep. Rothman**, **3-4 other Senators and Representatives, **for my various essays or manuscripts (i.e Sovereign Power book series, the Sovereign Debt Crisis, and my Sovereign Wealth book series). |