Economics, as academics, breaks down to psychology and social psychology. Micro-econ considers what the individual might do in any given market scenario. Take a hundred million or so individuals and now you’re into macro-econ. It’s the difference between one person making a decision based on his or her hopes and fears, and a whole bunch of folk caught up in mob mentality.
For all who do not know, among the ways the federal government raises money is to print paper; T-notes and T-bonds being those of primary concern here. Both are “securities,” which means they can be, and are, traded on the market. Both are traded at discount; a sum that is less than their face/redemption value. T-notes have maturities that are not less than one year, nor greater than 10, and are issued in denominations beginning at $1,000.00. T-bonds, on the other hand, are sold in denominations beginning at $1,000, have maturities greater than 10 years, and pay a stated coupon (interest) rate semiannually.
Today’s 10-year note sold at a yield of 4.19%. Today’s 30-year bond moved at 4.61%.
Remember Monty Hall’s Let’s Make a Deal? “Carol Thomas, c’mon down!” And Carol, dressed in a bibulous tomato costume, smiled wildly as Monty fetched a wad of rolled 20’s from his pocket, then rifled off one at a time into Carols palm until he reached ten. “Now Carol, you can keep what you have, $100, or trade that $200 for what’s behind Door Number 1. What do you want to do?”
Well $200, even in the 1960s, wasn’t a ton of money, and although Door Number 1 might contain Jay riding the back of a hog, it might just as easily feature Jay sitting in a brand new car. What would you do, keep the dough, or make a trade?
Essentially that’s the decision the holders of America’s $9.5 trillion worth of nation debt face each and every day: hold on to the relatively low yield, but supposedly highly secure, paper, or trade it. As the value of the dollar falls and our debt rises, the decision becomes easier and easier for those holding the debt and more and more dangerous for Americans when the paper is sold and the proceeds reinvested in other American securities; the stock of American corporations. (Remember, we are not talking of a few hundred or a few thousand shares either.)
As in every lending decision, whether to an individual or a country, the first concern is to the likelihood of a full return of the principle. The way the US has been heading — a dollar falling against other currencies renders the yield less and less valuable, while the surging national debt brings into play the anxiety of ultimate payback — is increasingly leading more and more countries to divest themselves of that paper and to invest the proceeds in our private corporations more and more.
Again, what would you do?
Gotta do something with the paper.
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