The three, two rule for government default

 Two points lost per year, three point error band, 15 year contract. Treasury can search for the mean, it is  the whole process.  If trader don't like it, then I suggest they enforce the Coasian game between the legislators and states. Cash payoff is the only known route around the bounds, call it revenue sharing, pay it. We get a much improved Fed contract in return.

The New Fed contract has the sanctity of debt, by the way. We are not skipping the amendment, but enforcing it. The government debt was traded away fairly, in return for this contract, enforceable by the Supreme court.  But the contract must have a stable exit point for Congress, exit by sufficient prior notice, for example. And the contract must have Due Process, Congress cannot trade that. The key term is contract length, the New Fed wants a longer leash, Congress wants a shorter leash. The pay off is huge, Congress will accept a 15 year.

Retail banks are neither more nor less guilty, we want the burden off them and shared fairly. A partition problem, solved by provable contract obtains by lowering transaction costs in the model until constriction was observable and installed the suitable trading pit. Even the Law, we know Due Process is passed through the contract, it is reductionism of the Law logic. We have seen the sanctity problem under Roosevelt.  It s easy enough to find a tradeable value for sanctity, an agreement between the sancitifier and sanctifee. Likely an agreement with the Senate alone might be enough since the right to manage coinage is pre-ordained.  The Executive has the right to manage liquidity of debt, under measured value accounting and manage the issuance of coinage. All of the managers approved by the Senate, all reporting, indirectly, back to the Senate.  There is a mix in there, where the Overton window on this seems reasonable.

The dynamics are simple. If government yearly ex post default exceeds five twice, the New Fed reduces its default account rate, and forces treasury back onto the lending side with fair interest charges. We will get some limit o yearly. direct  inflation, as high as five. maybe two or three quarters in a row. Like the Nixon hump, in half scale, an improvement.

The Senators, on seeing five percent direct inflation will scramble for efficiency as that comes out of state cash, revenue sharing. This is a direct construct between the senators and the New Fed, and Powell will be shrewd enough to insure state contingent payouts. The scofflaw cost comes from state capitals, in lost cash.

Powell has to know, this is all about keeping the banks out of the fiscal business. So Powell has to get this is about a longer term contract, and the New Fed gets deep enforcement, via incentives. The Fed is not a government tax collector, the fed does no go begging bankers for government bailouts, the Fed enforces fair banking and partitions out government affairs by a long term understanding.