If you suddenly won the Power Ball Lottery, and instantly had Multi-Millions of new found wealth -- would you Invest at least few Millions into buying U.S. Govt Treasury Bonds?
Bonds that pay a nice boring interest rate around 3% per year.
Bonds that can be redeemed at face value, at the end of 5, 10 or 30 years, depending on the "flavor of T-Bill" purchased.
Nations around the world, with excess cash on hand, face a similar "investing" dilemma.
Do we put our Millions somewhere "safe" -- and buy U.S. Treasuries for the long-term?
Or do we check out the latest "investment idea" that Wall Street is pedaling?
Hmmmm? Decisions, decisions.
Well, Wall Street is renown for making a Quick-Buck; for turning Hopes and Dreams into that ever elusive 20% annual ROI (Return on Investment).
But U.S. Treasury Bonds, are "backed by the Full Faith and Credit" of the U.S. Govt -- whatever that means?
The United States of America does honor its Debts, right?
always ... no matter what?
The U S of A is Credit-worthy, right?
Well, She used to be, anyways.
[Diarist Note: this Dairy was previously posted. So is if you are sensing Deja Vu there is good reason. If not, then carry on ... Goodbye DK3, here is my send off to her. She has carried us well ... Onward! ]
First, lets explore some of building blocks of how America, finances its ongoing and very expensive daily operations.
funadvice.com
Q: Who exactly is our national debt owed to?
Obviously we didn't call up china and say, hey we need a little cash to cover all of our expenses. They simply transfer funds where needed. [...]
A: Our government borrows money by issuing bonds and securities backed by the "full faith and credit of the US government." US bonds and securities have historically been a very safe place to invest and we have not had trouble finding lenders so far. Should the dollar weaken and become less stable foreign lenders could demand higher returns on their investments which would add a great deal to the legacy costs of our debt.
So America is selling other nations of the world -- the promise of America's long-term stability. For the most part, other nations of the world, buy it.
Afterall, it's conventional wisdom, that U.S. Treasury bonds are one of the safest investments around.
eHow.com
By Jonathan Langsdorf, eHow.com Contributor -- Jan 18, 2011
Are Treasury Bonds Safe?
Treasury bonds are direct obligations of the U.S. government. The securities are backed by the taxing power of the U.S. These facts make Treasury bonds one of the safest investments available.
Cost of Safety
The high level of safety associated with Treasury bonds means T-bonds pay low rates of interest. In January 2011, the rate on the 10-year Treasury note was 3.3 percent and Treasuries shorter than two years had yields below one percent.
Despite of the inherit safety of such investments, one of America's biggest purchasers of T-Bills, has expressed more and more apprehension, over the last several years, about their ultimate worth.
Apparently China's National Bank reads the newpapers too.
The Financial Times
By Robert Cookson and Michael Mackenzie, ft.com -- Feb 18 2010
Jitters over China’s waning taste for T-bills
If there is one thing that gets investors twitchy, it is the fear that China is losing its appetite for US government bonds.
As the biggest and most liquid pool of assets in the world, the US Treasury market lies at the heart of the global financial system and allows the American government to finance its trillion-dollar budget deficits. Until recently, China has been the largest foreign official holder of US debt.
[...]
And even if China is shifting out of US Treasuries, it would not necessarily cause trouble in the market as long as other buyers step into the breach.
... as long as others would "step into the breach" -- wow, that's kind of a scary way of putting it. It can conjure up images of ...
How big of a bridge would be needed to pick up "the slack" -- assuming someday, China DOES close America's E-Z Credit window?
How much DOES the U.S. Govt owe China anyways?
How Much Longer Will China Accept Low Returns On Treasury Bills?
by Hank Coleman is a staff writer for the Credit Score Blog -- 01/19/2011
China is, by far, the largest holder of United States debt. According to the latest numbers available, China owns approximately $900 billion worth of US Treasuries, T-Bills, and government bonds [$0.9 Trillion]. Interest rates in the United States have been stagnant for the past several years on Treasuries. So, the question remains, how much longer will China who these bonds and sit idly by earning an anemic rate of return? The answer may be a good long while but only because there are so few other options for China.
China is not about to "sit idly by" -- THEY expect Repayment on what they're owed. As well they should. They are ready to go elsewhere, if need be.
But the "full faith and credit" seal of approval does mean something, right?
If you can't trust your Banker/Borrower, who can you trust?
YOU know what? ... Do you know who else has been "Trusting in" that very same seal of approval?
US -- the U.S. FICA Taxpayer! -- that's who!
ssa.gov
Social Security Online -- Trust Fund Data
Q. Why do some people describe the "special issue" securities held by the trust funds as worthless IOUs? What is SSA's reaction to this criticism?
A. [...] Far from being "worthless IOUs," the investments held by the trust funds are backed by the full faith and credit of the U. S. Government. The government has always repaid Social Security, with interest. The special-issue securities are, therefore, just as safe as U.S. Savings Bonds or other financial instruments of the Federal government.
As I said at the top, YOU Already have invested in U.S. Treasury Bonds -- with all the life time of Social Security Payroll Deductions, you've been compelled to make. No opt-out option there, as I recall.
The long suffering American Worker has dutifully paid into the Social Security 'Trust Fund' for decades on end. And We should expect no less, than China does, From OUR Government.
American Workers should expect FULL Repayment on what WE are owed. The Trust Fund Surplus HAS BEEN invested in one of the safest investments around -- U.S. Treasury bonds, afterall.
America's Word is its bond. At least it should be. At least it used to be.
And exactly how much has the American Worker managed to accumulate in all our surplus Treasury bond investments over the years?
Trust Fund Data
February 3, 2011
Old-Age, Survivors, and Disability Insurance [OASDI]
Year | Total Income | Total Outgo
2001 $602,003,293,386.83 $438,915,617,678.71
2002 627,085,275,897.29 461,653,224,826.62
2003 631,885,790,121.09 479,086,453,028.13
2004 657,718,358,531.92 501,643,362,417.46
2005 701,758,171,960.50 529,937,504,804.51
2006 744,872,501,278.35 555,420,858,404.20
2007 784,889,453,834.60 594,501,473,005.86
2008 805,301,833,491.37 625,143,173,427.89
2009 807,490,352,910.12 685,801,033,978.42
2010 781,127,990,467.69 712,525,593,802.44
Old-Age, Survivors, and Disability Insurance [OASDI]
Year | Net increase in Assets | Assets at end of Year
2001 $163,087,675,708.12 $1,212,533,071,664.95
2002 165,432,051,070.67 1,377,965,122,735.62
2003 152,799,337,092.96 1,530,764,459,828.58
2004 156,074,996,114.46 1,686,839,455,943.04
2005 171,820,667,155.99 1,858,660,123,099.03
2006 189,451,642,874.15 2,048,111,765,973.18
2007 190,387,980,828.74 2,238,499,746,801.92
2008 180,158,660,063.48 2,418,658,406,865.40
2009 121,689,318,931.70 2,540,347,725,797.10
2010 68,602,396,665.25 2,608,950,122,462.35
[all amounts in actual dollars]
link to get even more Trust Fund details
That's a $2.6 Trillion Dollar Surplus. Looks like, Senator Reid was right.
American Workers "own" nearly 3 TIMES as much of America's "Good Credit", as China does !!
Imagine that.
The U.S. Goverment DOES have a Lender of Last Resort -- and the Lender is US!
Well a few more questions and answers before we go. It seems that very much depends on the "Iron-cladness" of the term "Full Faith And Credit" ...
investopedia.com
What Does Full Faith And Credit Mean?
A phrase used to describe the unconditional guarantee or commitment by one entity to back the interest and principal of another entity's debt. This full faith and credit commitment is typically employed by a government to help lower the borrowing costs of a smaller, less stable government or a government-sponsored agency.
[...]
It is generally accepted that the U.S. government will never default on its loan obligations. The full faith and credit of the U.S. government essentially confers risk-free status to securities such as U.S. Treasuries.
Since our future Golden Pond moments may one day depend of the Credit-Worthiness of the U.S. Govt and its repayment of Treasury Obligations -- perhaps we ALL need to get more up to speed on that concept, eh?
financial-dictionary
Full Faith and Credit
Federal and municipal governments can promise repayment of debt securities they issue because they can raise money through taxes, borrowing, and other sources of revenue. That power is described as full faith and credit.
[...]
Full Faith and Credit: A situation in which a government agrees to repay a debt no matter what.
What's more its "backed by" the Constitution. That's good to know, too.
legal-dictionary
Full Faith and Credit Clause
The Full Faith and Credit Clause --Article IV, Section 1, of the U.S. Constitution -- provides that the various states must recognize legislative acts, public records, and judicial decisions of the other states within the United States.
[...]
In drafting the Full Faith and Credit Clause, the Framers of the Constitution were motivated by a desire to unify their new country while preserving the autonomy of the states.
[...]
The Full Faith and Credit Clause is invoked primarily to enforce judgments.
SOOOO, Would YOU lend Money, to US?
No worries, you already Have. Like it or not. Uh Oh!
But you know what? There IS a saving grace in this latest episode of "Underwriting America's ongoing General Operating Fund" ...
The answer to all our National Debt woes ...and it too, is in the Constitution:
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
-- Sixteenth Amendment to the United States Constitution
Of course, Congress is not renown for making the best use of their "Powers" now, are they?
Instead of making the "hard decisions" like raising Taxes to 'Pay for Civilized life', it's much, much easier for them to just "kick that can down the road".
Afterall there IS always some other "greater stooge", that comes along, someone willing to step into "that breach", now isn't there?
Would the highest bidder, please step up. We haven't got all day here.
This GOP-inspired "Austerity Auction", must be finished, before the gavel is passed ... on to the next band of merry makers.
Step right up ... Everything Must Go. ... We've got a series of GOP Frat Parties -- to finally pay for!