debt and bonds

C. G. Estabrook galliher at
Fri Aug 25 11:31:59 PDT 2000

I received the appended from another list. Comments from this one?

C. G. Estabrook

"Here's something to think about in a leisure moment. We have discussed why it makes sense to pay down the National Debt as fast as possible, but we've been puzzled why such a smart businessman as George Bush wants to spend the surplus instead of paying down the debt faster.

"Here's an insight. The W St J today [8/24] said the Treasury is about to buy back $750 million of callable Treasury bonds with coupons of 10% to 14%. It seems that the result is

* The cost of servicing this very expensive debt is removed from the Federal budget; interest savings of $90 mm / year, roughly, if USG buys back $750 mm.

* There is no prepayment penalty; these are callable, therefore no premium to the holders of the bonds is required.

* 30 year bonds currently are yielding less than any other form of debt, around 5.6%, so even if Treasury had to re-issue them, the interest cost savings to the taxpayers would be about $45 mm / year on this $750 mm amount.

"If this is true, why wasn't it done sooner? Why wouldn't this be part of the discussion about how fast we pay down the National Debt? If $750 mm is good, $75 billion is better, $750 billion better still, and why stop there?? Pay off all the high rate callable debt, and do it fast. Make that the centerpiece of the campaign. It is so logical!

"When something so logical is not done, it's because somebody is interested if not letting it happen. Who could that be? Probably the holders of those bonds. It doesn't take long to realize that if the national debt is paid down, they will have a hard time finding any place that is as secure yielding such a high rate.

"Could it be that the very same people holding those way above market 30 year Treasury bonds include the fat cats who will get a tax cut if Bush is elected? Talk about having it, or getting it, both ways! That would explain at least part of the $100 mm in campaign contributions he has received.

"... As the debt is paid down, the interest rates are dropping. The more they drop, the less is required in the Federal Budget to service the remaining debt. That leads to still bigger surpluses, leading to still more aggressive debt repayment. The whole process can accelerate rapidly. This seems dandy. Is there any downside to this process?"


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