Environmental Economics

Interesting. That kind of thinking though isn’t limited to so-called right-wing economists – Dean Baker and others on the left have been peddling the idea for years.

… the value of our [government] debt will plummet if interest rates rise… we could buy back long-term debt issued today at interest rates of less than 2.0 percent for discounts of 30-40 percent. This would sharply reduce our debt-to-GDP ratio at zero cost.

And here’s how Dean Baker’s idea works according to Steve Roth:

Buy back $100 billion of 2% bonds at their new market value of $66 billion. Pay for it by issuing $66 billion of 3% bonds. Either way, interest: $2 billion.

So if we get this right, today’s bondholders would have to voluntarily take a 30-40% haircut on money they’ve previously loaned to the government (aka “default”), but in return, they can still earn the same amount of interest they were without the government defaulting on its obligations.
The only way this works in the real world is if the bondholders have inside information that an even worse outcome would result if they didn’t voluntarily take that deal, ala Cyprus….