What is a Financial Bond?

profitgenerator (68)in #money • 7 years ago (edited)

You have probably heard about sovereign debt & bond crisis on TV, and everyone talking about bonds and government debt, but you don't know that it is. You have probably also seen PSA on TV asking for you to buy bonds from your government. Well let me explain to you what bonds are, how they work and why you should probably not invest in them.

WHAT IT IS?

It is a debt-backed financial instrument, usually issued by government, but there are corporate / municipal bonds too (which are also usually administered by a corporation). We will focus on government bonds, because although the others are the same, government bonds are usually limitless, whereas corporate bonds should be backed by a firms profit.

HOW IT IS CREATED?

It is usually issued by the treasury department of your government, they hold weekly auctions, it depends on country, where the big banks send representatives for the auction and negotiate a price and quantity they buy. They are called Primary Dealers, and usually only a handful of corporations and banks can get access to bonds directly. However they might sell some to the general public on secondary markets for a fee, but usually keep most of it. This is a bit unfair and inefficient, since if the government would want more funding, they would sell directly to people via some marketplace that they setup, but this is how it is.

HOW IT WORKS?

A bond has a yield, interest and maturity date. The yield is the price change of the bond, so you can profit if the price goes up (it usually does), while the interest rate is the amount of interest the government pays when they re-buy the bond. The maturity date is the interval you lend your money to the government. There are different maturity bonds ranging from: overnight, 1 week, 1 month, 3 month, 6 month, 1 year, 5 year, 10 year, 20 year, etc...

So you buy 1 bond today for 100$, the government promises 3% interest on it after 1 year, you get back your principal the 100$, and a 3% interest, so you get back 103$ in 1 year.

Typically bonds don't have an income tax on them, but this varies by country. It would be stupid to tax a bond interest, since you already give money to the government what could they ask for more? This makes it a very attractive investment, since it is backed by the government, gives you stable returns, and it's smooth.

HOW IT IS BACKED?

This is the nasty part of it. Bond = Bondage, it is basically a form of slavery, let's analyze it. While for bond investor's it's a smooth profit generator, for the population is not.

Governments don't generate any income, their only source of revenue is the taxes they steal from you. The taxes are the collateral of the bond machine. Most countries run deficits, that is, they spend more money they get in taxes, so a portion of the taxes is set away as collateral so that they can borrow the deficit into existence, via bond sales.

The bond investors are technically financing the debt of the government, and keeping it away from bankruptcy, until there are bond buyers. If there are no bond buyers, no problem, the central bank will just print some money and they will buy it.

Bonds are backed by taxes, the interest paid on the bond, comes from taxes that people are paying. Either that, or from future bonds being sold. If the taxes are not enough, the central bank will just devalue the currency enough to keep it rolling.

Yes, it's obvious, it's a giant Ponzi Scheme, that is kept liquid by unrestricted inflation. This is why I said that corporate bonds are different, since a corporation goes bankrupt eventually, but the government is kept alive by endless money printing.

SHOULD YOU BUY BONDS?

In my opinion not. Not only it's a bad investment in my opinion, but it's also very very immoral towards the population. You are basically guaranteeing future tax increases if you buy bonds, because the government will have to increase the taxes to pay out the ever increasing deficit costs, and the previous investors (up to 30 years, for 30Y bonds).

If you don't buy bonds, then they will print up the money to finance it, but then you might just refuse to use that currency, and use Bitcoin instead. See inflation is voluntary, taxes are not, so I choose Bitcoin.

Although morality aside, the interest rates are low, usually higher than a savings account, but now they are rolling out negative bonds:

Scandinavia, Switzerland, Japan, you name it, if you invest in these bonds, you get back less than you invested + inflation. It is just madness, nobody sane would invest in this.

Not only this, but if they don't mess with the yield or interest rate, they might just default on it like Russia did back in the 90's:

https://en.wikipedia.org/wiki/1998_Russian_financial_crisis

And if they keep their promises then you will end up in hyperinflation like in 1921 Germany (you can't taper a ponzi scheme):

https://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic

And that will create people like Hitler, and Stalin, so it's 1 evil creating the other evil. So you should realize how the bond market affects the economy and your society.

Disclaimer: The information provided on this page might be incorrect. I am not responsible if you lose money using the information on this page! This is not an investment advice, just my opinion and analysis for educational purposes.