Is it good for the economny if we buy bonds issued by the Treasuery Department?

Question

I have street business knowledge, but no hardcore economics knowledge. If the people invest in bonds that are issued by the U.S government will it help us out of the biggest deficit in history?

Answer 1

First -- very few individuals invest in bonds. The bond market is controlled by institutional investors. So if individuals buy bonds, there will be very little effect.

Second -- how does increasing the debt of the government decrease the deficit? If the government buys more bonds, it will go deeper into debt, which increases the deficit.

There are two ways to decrease the deficit: Spend less or gather more taxes.

Answer 2

Taranto is dead on target. Brian is living in lala land somewhere. There are differences between physical assets and paper assets. Okay, the government buys the building and the building is indeed an asset. But, the government isn't selling buildings, it's selling paper assets and those assets are only as good as the ability of the borrower to pay it back.

On Dec. 15, 2006, the treasury dept. released it's report on the financial position of the U.S. Congress, about a year ago, mandated that the treasury being reporting the country's financial position on GAAP standards, not cash-basis like it's been doing. Now mind you, the US GDP is about $11 trillion. Now, on the aforementioned cash basis reporting, the federal debt is about $8 trillion. But that's just current debt. When using GAAP standarnds and taking into consideration long term debt and unfunded liabilities do you know what the federal debt is? Are you ready for this --------- $53 TRILLION. And that's just federal debt. If you take into consideration all government debt (federal, state, local) corporate and private debt in the U.S., the figure is pushing upwards of $80 trillion. The federal debt alone is 400% of GDP. Our federal government owe 4 times more than this country makes. So, Brian says the bond buyers have an asset. Okay, how much are those bonds going to be worth if the U.S. ever defaulted? Zero. But, I don't the U.S. will default. What they'll do is monetize the debt. That is, they'll print money to pay the debts. Printing money is inflationary, it drives the value of the currency down, so if the U.S. does indeed pay off the bonds, it will be doing so in devalued money. And since foreigners are the primary buyers of U.S. debt securities, a devalued currency means that they'd be losing money. I'll give you a non-bond example. China has $1 trillion in forex reserves, of that $700 billion is in US dollars. For every 1 penny the dollar drops in value, the Chinese USD forex reserves lose $7 billion in value. They're losing money just buy holding dollars. As the dollar depreciates, so do dollar denominated assets like U.S. treasuries.

Do you realize the U.S. government needs to borrow $2.4 billion PER DAY just to function?

I think Brian B needs to first study up on such matters before making such a ridiculous argument. Like I said, a bond is only as good as the borrowers ability to pay it back. One thing I forgot to mention, the $53 trillion federal debt I mention about is "net present value" meaning that to pay it off, we'd need $53 trillion TODAY, right now. Remember, the fed is borrowing at a rate of $2.4 billion per day and with an interest rate of about 5%, it's only getting worse.

You're neighbor could start a new business today and sell you a bond for $1 million to raise the capital he needs. Great, you have a $1 million bond paying say 5.5% interest. But, what is the ability of your neighbor to pay off that loan? If he can't, then that bond is basically worthless.

The U.S. is basically insolvent. I think the government knows it and has begun doing the thing I believe it would do - monetize, ie, print money to pay its debt. On March 23, 2006, the fed stopped reporting our M3 numbers. M3 is the broadest measure of the money supply. I believe that they did that to cover up the feds money printing activity. One of the several reasons that China is going to be diversifying out of dollars is because the fed stopped publishing M3, thus no one knows just how much the money supply is really growing and how much the dollar is depreciating because of that.

If you want to know how bad "money printing" can be, do a google search on the hyperinflation of Post WW1 Weimar Republic Germany. I'll give you a little hint, a sandwich in a restaurant during that time period was about 550,000 Reichmarks.

Answer 3

It actually hurts the economy. The government is borrowing your money and paying you interest. That causes higher deficits.

Another point to consider is that bonds are a terrible investment. They barely keep up with inflation.

Answer 4

People tend to have a sense that the US government is in some terrible financial situation because of debt. The thing to remember is that one man's debt is another man's asset. The problem with talking about US debt is this: Government buys a new building, the cost of the building is automatically added to the total US debt, but no consideration is given to the fact that the government also now has an ASSET. So we are always working with a false number.

Answer 5

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