Budget, Bonds, and the Rich

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I have noticed that some of the members of this board have intelligence and knowledge far surpassing my stimulus-response ceiling.

So, help me understand this...

In America we now have a HUGE budgit deficit of something on the order of 450 billion dollars. How does the government spend money it does not have? Loans from the American people taken out as bonds.

So what are these bonds?

Basically, loans with set interest rates (fairly high) that are not redeemable for long periods of time...in the order of thirty years or so. My grandfather just bought me one for Christmas...I am 23 years old...so when I am 53 years old his twenty five dollars will become my fifty...go gramps.

"Patriot Bond" was the title of it, so I knew, deep down, this was screwing me over somehow...and I think I have figured it out.

I am not rich...nor is my family. We do not have the overhead capital to buy large amounts of bonds. But lets I was rich...REALLY rich. Lets say I had something like 700 million dollars that I could invest. Couldn't I just buy a large number of bonds and then wait the thirty years to cash in?

I have read that about a quarter of our tax money goes to paying back loans the government has taken. What that means is...about a quarter of our tax money goes to the rich whom have had the ability to buy large numbers of bonds. So this huge deficit we have now will become taxes of the future which will then go to paying back the rich considerably more than they have invested.

Have I figured out something here? Is this how the rich are siphoning off the resources of the masses with not just the consent, but the agency of the federal government?

 

The savings bonds that you are talking about are not typically bought by investors. They tend to be of smaller amounts and are more likely to be bought by middle or lower class (I'm talking about income levels) people.

Most investors invest in Treasury notes or bonds. They work just like corporate bonds. In other words you pony up your principal, let's say $100,000. The bond then pays you interest only twice a year at a fixed rate. At the maturity of the bond you get your principal back or in our case $100,000.

They are very attractive to investors as you are fairly guaranteed your principal. If the U.S. were to default on them, the ensuing financial chaos would be biblical in nature. The interest earned is also not allowed to be taxed by any of the states.

U.S. obligations are an important factor of almost all sound financial planning. Even if the government had the resources to pay them all off and run without any borrowings, they would never do it for that reason.

 

In my experience Blackthorne TA is absolutely correct. I prepare the personal income tax returns for many people who I would say qualify as being rich and while they tend to carry some government debt (due to it being a very safe investment - definitely not due to it earning a high rate of return) they mostly invest in equities or blue chip corporate bonds.

I do have a couple of ultra conservative rich clients who invest mostly in government bonds but they are generally quite old and will start telling you tales of the Great Depression if you suggest they invest in anything remotely risky.

 

Well...alllright.

But I really would have rather you said "Good job kiddo, you and you alone have figured out how the rich lord over us in a conspiratorial manner worthy of your paranoia."

I have macroeconomics next semester...perhaps then I will have the resources to bring about the downfall of Paris Hilton. She's just so smug and goodlooking...arousing and trust-fund-beneficiary are two concepts that cannot survive the trip across my head and remain linked. Her day is coming...

 

Well, the public debt goes out to the public. Only a minimal share is held by private persons. A share is by companies, foreign currency/trade issues. And as the word "public" implies, the big share of the public debt is held by the public, i.e. the goverment of China. But the public debt is only a small share of the whole debt.

http://news.bbc.co.uk/1/hi/business/the_economy/380923.stm

Tah, no empricial bulding for debtor-nations. Too bad.

http://en2.wikipedia.org/wiki/U.S._public_debt

[ December 20, 2003, 01:56: Message edited by: Iago ]

 

Well, no. That is, I think no. It depends on what you mean. But if you mean that the majority of the debt is owed to foreign nations - I don't think that is correct. If you mean that the largest portion of the debt is owed to foreign nation - I think that is incorrect too.

I'm not searching high and low but a pie-chart I'll link corresponds to what I understand. The largest portion of US debt is owed to.... the US. One part of the gov't owes money to some other gov't agency etc. Foreign debt makes up roughly 20-25% of the debt (circa 1999 it was 22.7 apparently, it moves a bit up and down). Roughly 60% of the debt is privately held.

Here is a pie chart with pretty colors:

http://www.brillig.com/debt_clock/faq.html

 

Bloody hell! Don't make me go into a report on fiscal and monetary policy in the United States! I could write 20 pages on that in about as long as it would take me to type it.

Roughly 80% of the entire $6 trillion national debt is owed to Americans. To put that in perspective, the national income (GDP) of the American nation is ~$10.5 trillion. If you do the math, that is not that heavy of a debt load.

I believe that it's either the third or fourth highest expenditure in our nation. Once again, not much of a burden as our total debt is no more than 60% of our income. If you compare your own debt to your income, the percentage will probably be higher.

Government securities are generally not good investments for someone seeking to liquidate heavily relatively rapidly. If they were, then we'd have a problem with the crowding-out effect, ruining good fiscal policy. These bonds are excellent, however, to put into a 401k or IRA plan as they are guaranteed not to default.

During periods of recession, the Federal Reserve Banks will buy the securities off of you and give you cold, hard cash. These Open Market Operations form much of the basis for monetary policy.

Correct, since counter-cyclical fiscal policy requires that we go into a deficit in periods of recession. If the government actually attempted to balance the budget, we'd be shooting ourself in the foot. Functional Finance is needed to maintain economic stability (or at least, weaken the business cycle as much as possible).

 

OK...

Explain this to me like I am a child who drools frequently...

If 25% of our taxes go to paying interest on previous loans (80% of which are to ourselves)...then wouldn't repeatedly taking out more loans (running deficits) increase the overall percentage of our taxes going to interest which would increase the need for loans...starting the whole thing over again.

This makes sense to my pre-macroeconomics mind. Please explain why I am wrong in simple terms.

 

Laches, I think you and me are not so far off. I've wrote that the public debt is only a minimal share of the whole debt. But a big share of the public debt is held by foreigners. So it's the biggest share of a small share.

By "public" I mean, that what went on the financial markets as treasury bonds and so. By the way, I think China is only the second biggest holder of those, Japan is still the biggest, but China is chasing Japan is this aspect.

http://mwhodges.home.att.net/debt_b.htm

Now, what do I care about US-debt ? It's my own dam butt ! If the US in the nearer futer has problems to pay that debt back, it's going to be hard, hard rain all over the world.


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Your not wrong. There are two possibilities:

You buy a car and take a credit for 10'000. You think that you'll get a huge salary rise in two years. Whit thise rise, you'll be able to pay back the 10'000 with ease. So, it all depends getting the rise or not. If the US economy would change it trend, and grow faster then the debt, debt would be no problem, if not, it's about the same thing as Germany.

 

The public debt and the national debt are the same thing. The public debt is defined as the sum total of all of the debts of the Federal Government. Of that, about 20% is owned by foreigners.

For the most part, correct. You leave out the point that you're essentially taking out a loan from yourself, however. Besides, remember that the Federal Government can always make more money or raise taxes, something that a private individual can't (although from an economic standpoint, these are bad policies).

 

So, let me rephrase it. A smaller share of the national debt went on markets open to the public (as in various people). Of this share which went on the public markets, the biggest share was bought by foreing investors, like Japan and China.

This obviously brings up an intersting "holder-change" (correct ?) question. What if the main holder, that is public trust funds need that invested money for their tasks. They will ask it back from the goverment, which will need to have another creditor. As the trust-fonds will not be aviable, they will need to go with this share to public finance markets or either raise taxes heavily or cut spending heavily.

 

My only problem with this logic is that we have run deficits consecutively for as long as I remember. Admittedly, my knowledge of this subject is less than professional, but as far as I recall, the only surplus we have earned has been one year during the Clinton administration. All of the 80's, Bush Sr., 7/8's of Clinton's, and all of Bush Jr's years have been run with red ink. So when is the payback coming? Wouldn't the payback require approximately 22 years of budgetary surplus proportionetly equal to the deficit years (not withstanding interest which is accounted for by current tax dollars)?

Does that not sound like an impossible scenerio?

 

Well, old thread, but it seems to me someone is in agreement with my old economy school book.

http://www.msnbc.msn.com/id/4371103/