How on earth can gov't pay off bonds?

[Pianist4Freedom]

I don't understand how gov't can pay off bonds at interest. It seems to me that our system, as described by AceNZ, MUST eventually lead to hyperinflation, since all money in the system is debt, and debt must be paid off with more debt. That sounds like an infinity of compounding debt (eventually).

 

[Dr.3D]

They won't have to if they go broke.

Besides, with the decline in the value of the dollar, they will only have to pay a few cents on the dollar anyway.

 

[expatinireland]

If the US government were to default on their bonds no one would buy new ones so the Congress would be forced to take an axe to the budget.

The US might not be that far away from where the market will start demanding higher interest rates on US government bonds for the risk they entail.

The US is just a big Argentina waiting to happen.

 

[IPSecure]

Global Enslavement!

I don't understand how gov't can pay off bonds at interest. It seems to me that our system, as described by AceNZ, MUST eventually lead to hyperinflation, since all money in the system is debt, and debt must be paid off with more debt. That sounds like an infinity of compounding debt (eventually).

They will pay it off with Global Enslavement!

 

[AceNZ]

I don't understand how gov't can pay off bonds at interest. It seems to me that our system, as described by AceNZ, MUST eventually lead to hyperinflation, since all money in the system is debt, and debt must be paid off with more debt. That sounds like an infinity of compounding debt (eventually).

Taxes can be used to pay off bonds and interest, as I showed in my video. Another approach is to sell more bonds, and use the proceeds from them to pay off the old ones.

The debt doesn't automatically compound forever, though, for two reasons. First, interest paid to the public for bonds they hold enters the economy, so much of it comes back to the government eventually in taxes. Second, interest paid to the Fed on bonds they hold (only about 7% of all bonds) is rebated back to the treasury every year.

 

[expatinireland]

First, interest paid to the public for bonds they hold enters the economy, so much of it comes back to the government eventually in taxes.

So much US debt is held overseas these days that much of the interest paid is stimulating other economies ie China, Dubai, Saudi Arabia etc.

Ditto for the frigging tax rebate people will receive in April. Much of it will find its way to foreign economies for imported oil and toys.

 

[AceNZ]

So much US debt is held overseas these days that much of the interest paid is stimulating other economies ie China, Dubai, Saudi Arabia etc.

Yes, but remember that the interest is paid in dollars. For foreign investors, those dollars usually have to be converted to a local currency before they can be spent. As a result, foreign investors often end up spending the interest they receive to buy more bonds. If they do buy local currency instead, the transaction is likely to eventually bubble-up to their country's central bank, which parks the funds in bonds until they're needed. Or, if it goes through a US bank, then the money is back in the US economy. Any way you slice it, the interest usually doesn't disappear and eventually ends up flowing back to the US in some form. The exceptions include when the bonds or interest are redeemed for cash (FRNs) -- and there is definitely a lot of cash held overseas...

 

[Tom228]

So much US debt is held overseas these days that much of the interest paid is stimulating other economies ie China, Dubai, Saudi Arabia etc.

Ditto for the frigging tax rebate people will receive in April. Much of it will find its way to foreign economies for imported oil and toys.

30% is held overseas (I'm just rounding percentages)
70% is domestic

So only 30% can truly cause a lot of harm.

Worse case scenario the government prints more dollars then we end up like Caesar Chavez and start shaving off zeros on our bills or Zimbabwe and outlaw inflation.

 

[CaveDog]

Consider it in the light of personal finances. As long as your income at least keeps parity with your living expenses plus your debt payments then you can pay the bills. If debt starts to outpace your income or your income slow too much to keep up then you have a problem.

As long as our national economy grows then the government can siphon off enough to pay the interest on a growing national debt. If economic growth slows too much or government borrows too much then we have a serious national problem.

 

[kyleAF]

Does anyone have numbers on exactly how many FRNs are extant here in the U.S. vs. abroad??

I'm not so sure that digital money in foreign accounts could be returned to us unless we allow it. We could freeze all accounts of foreign governments...though the FRNs could be sent back and there's not much anyone can do about that.

It would be a political faux pas to freeze the accounts, but the alternative is having all of our real goods bought up by the Chinese while our currency collapses...

What's the ratio of foreign debt held in terms of digital account money and actual FRNs??

 

[Doktor_Jeep]

Collapse of the dollar = Liberty.

We just have to be ready to fight against the Hitlers and Stalins the people will want to elect when they panic, and anyone these send after us for using competing currency.

 

[DrCap]

the government will always pay back all its bonds because it owns the printing press- if you have a really big copy machine, and 1 $100 bill, and you could start copying it, and people would accept it at the store, you could just buy more ink and paper and keep copying more, and hire people to copy it for you, etc etc, and all of sudden you'd have a boatload of cash, which you can then use to pay off your bond debt. of course this will worsen inflation and the money may not be worth anything by the time it gets paid off, but the government bonds will be paid off in dollars, the government won't default - of course the easier way to do this is just to type some numbers into a computer and 'create' money that way, it seems to be faster for the fed ' oh here's $30,000,000,000' for a term auction facility. most money is not even in actual paper form now, most of it is some number on a computer screen and the fed can create this out of thin air.

 

[AceNZ]

Does anyone have numbers on exactly how many FRNs are extant here in the U.S. vs. abroad??

As of Dec 2006 there was a total of $820B in FRNs in circulation.

A report in 1995 concluded that 55 to 70% of all currency was located abroad and that the fraction was increasing. In 2001, the Fed estimated 50%. The Fed now says that the "majority" of currency is located abroad. If we estimate 65%, that would be $533B.

I'm not so sure that digital money in foreign accounts could be returned to us unless we allow it. We could freeze all accounts of foreign governments...though the FRNs could be sent back and there's not much anyone can do about that.

It would be a political faux pas to freeze the accounts, but the alternative is having all of our real goods bought up by the Chinese while our currency collapses...

And THAT, my friend, is exactly how wars get started. Bad, bad idea.

Rather than being so heavy-handed, the US will just continue to debase the currency, so that investors get paid back with a fraction of what they loaned in terms of purchasing power. (BTW, that's another reason the government lies about inflation: if foreign investors knew how bad it really was, they wouldn't buy as many treasury securities and interest rates would be much higher).

What's the ratio of foreign debt held in terms of digital account money and actual FRNs??

All US debt held by foreign investors is held digitally. When someone holds US debt, they own a treasury security of some kind (bills/notes/bonds).

 

[kyleAF]

As of Dec 2006 there was a total of $820B in FRNs in circulation.

A report in 1995 concluded that 55 to 70% of all currency was located abroad and that the fraction was increasing. In 2001, the Fed estimated 50%. The Fed now says that the "majority" of currency is located abroad. If we estimate 65%, that would be $533B.




And THAT, my friend, is exactly how wars get started. Bad, bad idea.

Rather than being so heavy-handed, the US will just continue to debase the currency, so that investors get paid back with a fraction of what they loaned in terms of purchasing power. (BTW, that's another reason the government lies about inflation: if foreign investors knew how bad it really was, they wouldn't buy as many treasury securities and interest rates would be much higher).




All US debt held by foreign investors is held digitally. When someone holds US debt, they own a treasury security of some kind (bills/notes/bonds).

If all debt held by foreign nations is digital, then how are the 530 Billion or so FRNs making their way out of here? American tourists exchanging dollars abroad? I believe the government only pays interest on its debt digitally, not with FRNs.

And I understand that the freezing of funds is a bad idea in terms of sparking a conflict, so I agree that the debasement of the dollar is the only "viable" way out. Otherwise, we could lose out on the products of the 30% or so of our economy that actually produces anything (compounding the problems)... since the foreign-held dollars will just be used to buy everything from us before we crash completely... they'll want to get something for their defaulting debt investments. That something will likely be a majority of our real goods and assets: anything they can buy up.

EDIT: Perhaps another option would be to simply forbid exports during the crash. We'd already have China and others pissed at us for basically declaring bankruptcy again, but we could still allow them to "buy" our stuff as long as we don't allow exports. It would screw with our system, but in the midst of a crash, who'll notice?

If our debt is no longer accepted as the worldwide currency, our bubble will collapse, and then we've no other options but to limit the damage as much as we can.

We will have to avoid an outflow of real capital and wealth: render the dollar worthless to purchase our goods as fast as possible, and at least some production will remain with us.

 

[AceNZ]

If all debt held by foreign nations is digital, then how are the 530 Billion or so FRNs making their way out of here? American tourists exchanging dollars abroad? I believe the government only pays interest on its debt digitally, not with FRNs.

Right, interest is only paid digitally.

Let's say I live in a country with an unstable currency. So I go to the bank and ask to exchange some money in my checking account for US dollars, thinking they will be better than the local currency. Voila! US dollars are now circulating overseas. The foreign bank can obtain more notes, when needed, by buying them from a correspondent bank in the US at the prevailing exchange rate.

Most foreign banks are extremely good at handling these types of foreign exchange transactions. US banks are terribly bad at it.

If our debt is no longer accepted as the worldwide currency, our bubble will collapse, and then we've no other options but to limit the damage as much as we can.

The "usual" approach governments seem to take to address this problem is to impose currency controls, which apply restrictions on the amount of money than can be taken in or out of the country. Artificial foreign exchange rates are also often established at below-market rates.

Of course this kind of thing always makes things much worse in the long run, but it's been tried countless times anyway as economies begin to seriously falter.

 

[Banana]

A hypothetical question:

Suppose Congress declare government to be bankrupt.

What happens? Do we just pick up our broken pieces of our lives and move on as if nothing has happen or do we throw the global economy into a total disarray and trigger a nuclear holocaust?

 

[jclay2]

I know how they can pay off their bonds, SELL MORE BONDS!

 

[AceNZ]

A hypothetical question:

Suppose Congress declare government to be bankrupt.

What happens? Do we just pick up our broken pieces of our lives and move on as if nothing has happen or do we throw the global economy into a total disarray and trigger a nuclear holocaust?

If what you mean is what would happen if the government refused to honor its existing debt -- I think that's a good way to start a war. Even without a war, there would be global economic chaos and the US would suddenly be unable to buy anything from abroad, including oil. The US economy would grind to a halt. Mass unemployment, starvation, etc. No more plasma TVs. It wouldn't be pretty.

 

[Banana]

The reason I asked was because I was wondering who is actually holding the debt. I had took it to be us (the taxpayer), so declaring bankruptcy wouldn't be (relatively) bad if it was us who got screwed. But apparently the debt is indeed real and if I'm reading it right, we're exchanging bonds for oil or something like that, so that would kill us, with or without a war.

 

[Pauls' Revere]

If what you mean is what would happen if the government refused to honor its existing debt -- I think that's a good way to start a war. Even without a war, there would be global economic chaos and the US would suddenly be unable to buy anything from abroad, including oil. The US economy would grind to a halt. Mass unemployment, starvation, etc. No more plasma TVs. It wouldn't be pretty.

Not honoring our debt would bring our national credit rating down. We have a triple A rating (AAA), the same way other bond issuers are "rated" although it is the federal government instead of say a insurance company, or other level of government such as a municipal bond. Consider other countries such as I dont know...Ethiopia, where do they stand on credit worthyness on the world stage? The US would lose it's credit worthiness drastically, but then again all they have to do is tax you and I to raise that money. Wait..they already are doing that, so the answer is to tax the current population and borrow against the "taxable" wages of future generations when they start to enter the workforce. I wonder just how high those future taxes will have to be to pay for a 53 trillion dollar debt? not including the interest on that 53 trillion! Any answers?