Here is an unemotional explanation of, what is to most people, the mystery of Govt debt. No climbing on high horse to hide one's own lack of knowledge, no put downs, etc.
However a vastly more sinister hidden agenda is exposed further on regarding the way Labor has chosen to "waste" these borrowed funds.
Sovereign debt is money investors lend to governments to fund such things as deficits or large infrastructure projects.
This debt is often in the form of government bonds that last over varying periods of time up to as much as 30 years. At some stage all this debt has to be repaid or re-issued - it usually is more or less one event.
The bond market depends on governments issuing "debt", just like we need companies to issue shares - if they didn't, there would be no share market and without debt, there would be no bond market. So, it's essential that government debt exists, even if they don't need the money from investors. This is a point that is rarely made by commentators.
For the last year we have been hearing much about the debt woes of Greece, Spain and to a lessor extent Italy. Spain actually has very low levels of debt compared to many countries; the real problem is what it has to pay for the debt in terms of interest rate or yield. It's the interest or the cost to the country that is the real problem.
If the cost comes down, the strain on national budgets to keep up the interest payments becomes acute and this is why the ECB stepped in and stated they would buy bonds from countries like Spain and Italy and this immediately drove down the yield on their bonds and the strain to their national budgets. Owing the money is not a problem; it can be rolled over and over for decades. It's the cost of the money that is the problem.
If you could borrow a million dollars at 1.5%, would you try and repay this as soon as possible or would you hold it for as long as possible? The smart investors would hold on to this money, pay the 1.5% interest and use it to make more money and hope it was never repaid as it would be eroding at somewhere between 1.0% - 2.0% per annum due to inflation.
In the case of the US debt everybody likes to throw around big numbers to frighten people, such as $16 Trillion dollars of debt and this is truly big number. It would be like Australia having a debt of $1 Trillion, whereas in actual fact we have one of the lowest debt levels in the OECD of $250 Billion, a quarter of a trillion. Although Australia does have amongst the highest private debt levels in the world at 156% of GOP. This mountain of debt that Australians owe is $2.2 Trillion, so our politicians shouldn't be too smug about our situation. But the question is "is debt all that bad?". The answer is YES, but only when you can't service the loan.
However, as we all know, you and I have to repay a loan when it's term comes due or we have to refinance it -governments do the same thing but unlike us where we can be rejected for a further loan, a government can just create money and this is the essential difference between government debt and private debt. Government debt can remain in perpetuity and never be repaid - it's that simple.
So what happens if it's not repaid - ever? Well let's take a US Treasury 10 year bond - say, for a $1m. It currently yields around 1.6% and us inflation is expected to be average around 3% over the next 10 years. Remember once you buy a bond at a certain yield it doesn't change for the time of the bond. The only variable is cost or price of the bond creating a capital gain or a loss, depending where rates head. Now, after 10 years your bond would have lost an estimated net 1.4% over 10 years and would be worth $870k.
In fact, if the whole US debt of $16 Trillion were issued in 10 year bonds it would turn into $13.9 Trillion in 10 years without doing a thing or paying off a cent. In 30 years, it will be worth $10.5 Trillion and the US economy will probably be double the size it is today, therefore debt will go from 100% of GOP (which we are told is bad) to 30% of GOP (very good!) without paying back a cracker.
Now, here is the cute trick so many people have missed. The Federal Reserve can manipulate rates to wherever they want. You keep interest rates at next to nothing for years and the cost of the debt just keeps eroding. You just keep printing money, within limits of course and the rates will stay low.
Some people will then scream, "This creates inflation!" Yes, it does, but just say inflation due to all this money printing (quantitative easing) ticks up inflation to 4%, but the Fed keeps rates ultra low still) what happens then?
Well, that $16 Trillion debt that everyone is obsessed about will erode at a 2.4% rate each year and will become $7.8 Trillion in 30 years. The US government does not have to reduce this debt at all and it knows it! All it has to do is reduce the deficits so the debt doesn't keep growing at a greater rate than the GOP. That is what they are trying to do now. That is what countries all around the world are doing now. Sovereign debt does not need to be repaid. It is eroded by the manipulation of interest rates, inflation and money supply.
So, forget about the US government's debt, it will disappear over time (relatively speaking) without a cent being repaid and the losers will be investors who thought sovereign bonds were good, safe idea. -------------------------------------------------
Now the LABOR "Govt" is using this bond trick to "fund" the NeverBuiltNetwork and then saying it is not an expense but an asset and so it does not appear on the FUDGET which is OK by accounting standards.
Has anyone wondered why the FABIAN Socialist LABOR Govt is so keen to build the NeverBuiltNetwork instead of new railroads, dams, highways, etc which are of long lasting benefit to Australia ?
It is patently obvious that the LABOR Govt is not there to serve the interests of Australia as it is being paid to do but is there to serve its own hidden agenda interests which is basically to convert Australia to a Communist country.
Now a govt controlled network which reaches into every household is an ideal PROPAGANDA facility. The govt control will censor all information going to the people and by monitoring traffic the Govt can identify those people that are hostile to the Govt.
This is a modern digital version of the secret police tactics used by the Soviets in East Berlin after the war where houses were secretly wired and phones were tapped and secret police were everywhere watching hostile citizens.
For the future of Australia as a free Democratic country DO NOT VOTE for LABOR at the NEXT ELECTION in 2013!!!!
