If you don’t own some U.S. Treasury bonds, you should.
After all, you would be earning interest on your money.
The most recent stimulus package, which is well north of $1 trillion, is expected to increase the country’s debt by $2.5 trillion in the onset, and can rise over time if interest rates spike – especially due to inflation.
The ownership of the federal debt is broken down as such:
$2.38 trillion –
$5.73 trillion –
$6.21 trillion –
$6.89 trillion –
The Federal Reserve can purchase debt, using treasury bonds, away from mostly large businesses. They call this ‘quantative easing’ and the fed uses the initial capital infusion from treasury bonds to pay for the debt.
The U.S. government owns debt on social security and pensions… yes, it’s that much, 27% of total federal debt, actually.
Most people think China owns the lion’s share of the U.S. debt but, as outlined above, that’s not true. In fact, even within the foreign investment sector, China just hedges Japan for largest holders of U.S. Treasury bonds – $1.3 trillion to $1.1 trillion, respectively – totalling just roughly 30% of foreign investment, or 10% of total debt between the two countries.
Another piece to note is that these numbers only reflect ownership of debt as of the end of 2019, they do not reflect the most recent stimulus – or anything that comes after.
Now, for the investor side, a treasury bond functions as such – the investor chooses a 10 year or 30 year option, and the bond’s return will be based on the Fed funds rate. The bond pays semi-annually, at that rate.
So, at a 2.75% interest rate, the bond would pay $27.50 per $1,000 face value, split in half, twice a year.
The clincher is, at maturity, the government owes you the face value as well.
So, a $1 billion investment (pennies compared to the grand total) would net $27.5 million per year. Pretty lucrative considering the investor receives the face value back at the end of the life of the bond (10 or 30 years).
But, delve down for a second and consider what this really means in the grand scheme of finance. The government is utilizing the tax dollars of American citizens, to finance debt, to run the business of the government.
There’s no capital expansion coming from these investments, no research and development that will eventually lead to a surplus allowing to pay down debt. In fact, the government is within a crisis or two (COVID-19, anyone?) before it flips and either sweeping cuts will have to come to already over-leveraged government services, or the government will default on the loans.
The scary part about default? Add it up, 70% of those loans are based locally, here in the United States.
Here’s a fun hypothetical – let’s say Company Y, who’s involved in the war efforts abroad by supplying men and arms, continues a steady uptick in pricing. The government, bound and determined to keep the war machine going, increased spending on the Department of Defense to nearly $750 billion – and borrows to help fund that effort.
Here’s where it gets fun – after earning their portion of that billions in borrowing, the company re-invests a portion of retained earnings into what? Treasury bonds, of course. The same debt vehicle used to fund their paychecks in the beginning, effectively allowing them to earn double just by doing their job.
Did I mention interest earnings on treasury bonds are , locally, tax exempt?
Yes, these companies have to have that kind of buying power, but wrap your head around $6.89 trillion in local investment. That’s a six (6) with twelve (12) zeros (0s) behind it. Even $50 billion, which by reckoning of the earlier explanation would return several hundred million a year, is a lucrative investment.
Now, T-Bonds (so they’re called) are used to hedge bets on more volatile investment portfolios for most average individuals. But first, remember that nearly $7 trillion number, and combine it with the fact that over 50% do not having savings, retirement, or investment – and you start to see a picture where wealthy folks are earning double-rewards, cash back, and instant rebates on taxpayers dollars.
And the only reason the government needs to borrow is because they cannot agree, on anything, and many figure there’s no such thing as a ‘debt ceiling.’
So, we’ll just keep expanding the budget, right?
Tell that to those borrowers who call on their bonds when the U.S. defaults on just one loan – much less many.
This is a bi-partisan issue, no lawmaker has made a real attempt to cut the budget in years, and President Donald Trump has signed off – year-over-year – just like his predecssors.
During his inaugural year, in 2017, there was some grumbling from the Oval Office chief, but he signed off on the omnibus all the same.
One would think that government investment in infrastructure, research and development, and little else would provide the catalyst to increase GDP even further and raise salaries so that the tax base could rise. The only time a country would have to borrow for immediate capital would be something like… a disaster?
So until that time, if you’ve got the spare capital, it’s a lucrative proposition to invest in T-bonds. So long as American’s continue to pay their payroll taxes, income taxes, and all other manner of taxes – the federal government will continue to pump out interest payments on these loans.
One wonders what will happen if, suddenly, many were taken off the tax rolls and make a nominal payment on their unemployment earnings?
Like during COVID-19?
Time will tell.
J. McHugh David is editor and publisher of the Livingston Parish News.