Treasuries
In the previous post, we have covered Singapore bonds. In this post, we will look at the most liquid bonds in the world, US Treasuries.
US debt is depicted in the chart below
US debt currently stands at around USD27 Trillion. The chart also did a comparison with US GDP and it can be seen that the country is in negative cashflow. Therefore, to finance government policies to keep the country running, money is needed. This is done through government bonds issuance known as Treasuries or Treasury Bonds. These bonds can range from 3 months to 30 years.
By issuing these bonds, US debt increases as depicted in the chart. These bonds are sold to banks, financial institutions and retail investors. In return for the cash, an interest is paid known as treasury yield.
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With onset of the pandemic last year, US federal bank has been purchasing USD80 billion worth of bonds each month. The earliest tapering will only begin in year 2022. The aim is to induce liquidity into the markets; keeping businesses afloat, people can stay hired and money is not withdrawn suddenly which can lead to a economy downturn. If liquidity is not maintained and nobody spends any money, businesses will fail, people get retrenched and eventually loans will not be financed affecting the banks. When banks are facing a liquidity crunch, economy downturn is almost inevitable.
The downside of increasing cash in the market is causing inflation to shoot through the roof as spending power is increase which I have explained in this post on “Interest rates and Inflation”. https://wordpress.com/post/lazymaninvesting637459160.wordpress.com/75
High inflation will increase cost of living. This is reflected in the prices of food (pork and poultry) and petrol over the past few months.
A long term problem of continuous debt issuance will make national loans impossible to pay off. At the end of the day the US government will only be paying the interest and not the capital. This will eventually burdened future generations. They might face higher taxes and interest rates on loans, raising the cost of living.
There is no simple solution to this unlike an individual who can reduce expenses and pay off the debts diligently. As US is a mature economy, it is even harder for them to increase their GDP to reach a surplus to pay off the debts. In other words, their income (GDP) will not be able to surpass their debts, making it extremely hard to pay off.
It is also interesting to know that in Oct 2021, the current administration proposed an increase in debt ceiling to prevent defaults. They have to reach an agreement by 18 Oct, otherwise, certain government payments will be defaulted.
In conclusion, it is easy to take on debts but extremely difficult to get out.
Disclaimer: Not financial advice, please do your own due diligence before investing.
