Debt may be a long term problem, but it certainly isn't an emergency

[A HERETIC I AM]

5. Then I'll do my best to help you understand them just a little more.

"Except that if they have to be redeemed they are not "sold." They are still loans."

While it is true that a bond represents a debt, it is also and more importantly, a security, just as a share of stock is a security. It has a value. It is tradeable. That last item is most important. If you have a mortgage, YOU can not trade it to someone else. Same with your credit card debt. The issuer in those cases can sell it, but YOU can not.

"They still have an interest charge that means, essentially, they have to be bought back for more than they were "sold" for."

You are confusing two basic types of bonds. Look at this page from Bloomberg;

http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/

Note under the column "Coupon" that the first three - the 1 month, 3 month and 12 month show "0.00". These are what are known as "Zero Coupon Bonds" which means that they pay no regular interest payments. They have no "Coupon" payment to them. They, just as every other bond the US Treasury issues and the OVERWHELMING number of bonds issued in the USA, be they corporate, municipal, mortgage or government, have a "Par" value of $1000.00. With a zero coupon, you buy them at a discount to that par and they mature at par. In the case of the 90 day quoted at the link, the amount one of them would cost you at that quote is roughly $999.975 and in 90 days you would get $1000 back. The yield quoted for that 90 day note is 0.01% and that is an ANNUAL yield. Since there are 4 - 90 day sections in a year, you have to divide the .01 by 4 to get the figure for what one would cost you. If you rolled that over when the 90 days was up and bought another at the same yield, and then did that twice more, you would realize a grand total of ten cents in gain over the course of a year on your $1000 investment.

Note that the first one on that page with anything in the coupon column is the two year, and the coupon quoted is 0.125%. This bond pays point one two five of a percent in interest based on that $1000 par. In other words, it pays $1.25 in interest per year for two years and these interest payments are evenly split into two installments paid 6 months apart. On the date the bond matures, you would get the second half of the buck and a quarter owed for the year and your thousand dollars back. All coupon rates are based on that $1000 par figure, REGARDLESS of what the bond is selling for.

The 30 year has a coupon of 3.125%, so it pays $31.25 a year, again, split in two, for 30 years and on the last day, just like above, you would get $15.625 and the par deposited to your account.

The vast majority of bonds work in a similar fashion. They have a set coupon (That is why they are often referred to as "Fixed Income" investments) and a set maturity date.

Some bonds have what is known as a "Call" provision or are "Callable" bonds which means that the issuer can call them in, give you your money back in a fashion specifically spelled out in the original offering documents and you have no recourse. The US Treasury DOES NOT ISSUE Callable bonds. A bond can also be "Putable" meaning that the holder can demand payment of principal, but these are EXCEEDINGLY rare and the only US Treasury bonds that fall into this category are certain series of US Savings bonds that are generally sold directly to individuals and represent a tiny fraction of the overall outstanding debt obligation of the Treasury.

I want to expand on the idea of callable bonds. I have read repeatedly over the years on DU, both in GD, in the Economics forum and indeed in the much vaunted "Stock Market Watch" thread that the Chinese could "Call in their markers" (as one nitwit long ago put it) or that they could somehow come to the Treasury with a stack of their bonds in hand and demand payment. NOTHING COULD BE FURTHER FROM THE TRUTH. The Treasury would laugh them out the door. They can sell them on the open market till their hearts content, but, with the exception of the aforementioned certain series of US Savings bonds, no US Treasury Bond is redeemed by the Treasury before it matures. NONE.


"The Chinese aren't just giving the US government free money; they expect to get it back and they expect to get more than they put in. "

Yes, they expect to get it back and yes they expect to get back more than they put in, just as you do when you put money into an interest bearing account at your bank. But for the most part, they are getting (currently, anyway) a pittance more in relative terms. At the beginning of Clinton's first term, the COUPON on the 30 year was 8%. EIGHT! That's $80.00 per year per bond. You can still buy those bonds because they have ten years to go, it's just that they have been bid up to the point that they would cost you between $1200 and $1550 per bond, depending on the maturity date and the yield pressure on the day you bought them. I should note here, BTW that When Clinton came in to office, he was left with that 8% bullshit by the previous REPUBLICAN administration. By the time he left office, not only had the coupon fallen to less than 5.5%, he had eliminated issuing 30 year paper. Why? Because he got the Congress to balance the damned budget and ran a surplus. Under Dimson, shortly after 9/11 the government started spending money like it was free and the Treasury started to issue 30 year bonds again, (To fund two wars and the other crap) and the coupon rose to 5% in 2006.

"If the US, or any other country, isn't exactly begging hat in hand, the fact that they have to sell bonds, whether Treasury bonds or savings bonds, indicates that they need more money than they have."

Absolutely correct. Blame that on Congress who historically seems to love to spend money on bombs, missiles and hundred million dollar airplanes and billion dollar submarines with no mission but refuses to ask those who all that crap most benefits to pay for it through taxes.

"They are selling a debt, selling a promise to repay the money at a stated point in the future. That's still money that's coming from someone else."

And that someone else is essentially the American Taxpayer, which is exactly what Krugman was saying in his piece.