Any time the government wants to start a new public works project, fund some new initiative or roll out a new program of any kind it needs money. It can literally print money, but that devalues the dollar. A system needs to be in place that allows the government to buy and sell loans like a bank. Except the government is actually three entities. The federal, state and local governments each issue bonds.
If we examine the debt from 2004, which was near $7 trillion, we notice that not all of that debt was held by investors in the form of bonds. About half of that debt was held in reserve, with no major implications for the economy.
Foreigners can hold American debt, and held about 25% of it during that time. The remaining debt was held by private investors with a set maturity date. By default, bonds mature in just a few months. They can be extended for many years, up to 30. This term represents the length of time that can pass before a bond is repaid, but the public usually doesn’t discuss bonds this way.
We tend to measure bond spending (borrowing) based on the rate of inflation.
Inflation can dramatically alter the debt, even though inflation is akin to measuring an on-paper loss. If we try to examine something simple, like a can of soda, then a bond represents how many cans of soda we can buy on the market. If the value rises, or inflates, then the soda cans we can buy decrease. So inflation, while not reflective of real value, influences real value because we tend to think in the present moment.
About the Author: Samuel Phineas Upham is an investor at a family office/ hedgefund, where he focuses on special situation illiquid investing. Before this position, Phin Upham was working at Morgan Stanley in the Media and Telecom group. You may contact Phin on his Samuel Phineas Upham website or Twitter.
