The debt game
The deceptive trick about raising the bailout money is that our government is not
funding the bailout through budgets cut and new taxes, but rather by selling more treasury debt (t-bills,* t-notes, and t-bonds). Interest on the federal debt us now the second largest budget item after military
spending.** T-notes and t-bonds are sold at a discount (below face value). They also pay a percentage interest collected every 6 months. This is money spent on interest in the U.S. debt is thus money flushed down the toilet, for it buys nothing we can use.
The down side to selling more bonds is that we and future generations are saddled
with the interest unless they pay off the t-bonds and notes. Moreover, since
they are sold at a discount, thus requiring the sale of an ever increasing amount to replace the old ones that have matured. Secondly for to sell the t-bills, they must be made attractive. This become ever more difficult given (1) the huge amount being sold monthly, (2) our ever increasing economic
instability, which has been made ever more obvious through this market meltdown. To make the t-bonds attractive top foreign
investors, they must promise a decent return which is accomplished two ways. Now
favored is the falling dollar. The Euro has gone up nearly 50% this decade above the U.S. dollar. For the sake of clarity,
I will use rounded figures. A European bank spends 1 million euros on t-bonds
it will get $1.5 million in t-bonds (ten years ago the same amount of euros would have only bought $1 million in t-bonds). Then if now the trend has reversed and the dollar goes up so that 1 dollar = 1 euro,
then they will have 1.5 million euros. The second way to make the next batch
of t-bonds attractive would be to pay an even higher interest rate. Finally the
t-bonds will be sold. If the latest batch won’t sell at the discount rate
of 95% then the discount rate will drop. Thus a $1,000 t-bond requires only $950
dollars. If there aren’t buyers at that price the price will drop, until
all of them are sold.
* T-bills are short term notes that are sold at a discount to face value; for example
for $9,900 dollars and mature at $10.000. They are short term, from 1 month to
T-notes mature in 2, 5, or 10 years, while t-bonds are from 10 t 30 years. 30-year bonds are issued quarterly. There
are also the less significant series EE bonds and I Saving Bonds which are sold to the public.
**Social Security is a separate item. We pay a special tax that goes into the social