Last Updated on August 23, 2020
That is like asking a farmer who grows corn and owes someone 6 bushels of corn,
“How can you be in debt?” Easy!
Farmers borrow today to buy seed and fertilizer today to pay off their debts with crops that will come in tomorrow. Of course I mean here that today and tomorrow can be a year apart!
The better, more useful question would be
“Should you invest in national or “sovereign” debt?”
Governments borrow and will theoretically pay off (or at least pay interest) with taxes they collect in the future. In fact some cities and town call the commercial paper (I.O.U.s) that they issue “tax anticipation warrants.” But when every man, woman and child in America owes more in terms of national debt than they can earn in a lifetime…. well? How will it be paid? One guess?
The funny thing about national debt is that if the debt is issued in the national currency, the nation can print worthless money and pay off their debts that way. Thus sovereign dollar bonds may (theoretically) be paid off with dollars that have much less value than they do today. When I was a kid, everybody bought USA War Bonds that yielded 3% per year and were due in 10 years. You got $100 back for every $75 “invested.” But 10 years later the purchasing power of $100 was below the the value of the $75. Since 1950 inflation has accelerated so much that a 3c 1st class postage stamp is now about $1. Want to loose 97% on your investment? Buy treasuries! The risk and lousy return is why bonds are generally considered a bad bet. If they don’t go completely sour—think Mexico and Argentina— they pay off and what you get back isn’t worth anywhere near what you paid. Argentina that goes bust every 20 years with great regularity has just issued 100 year bonds.
Would you buy them?