Somehow I'd always thought that governments work by using our tax money to do stuff. I never knew that borrowing money was a time-tested tactic, and lending money to government is technically called risk free investment.
Typically governments borrow during sudden calamities like War. For example, during the Civil War, govt. debt went from $65 million to $2.7 billion. Most famously, during World War 1, US govt. invited people to lend. See this Charlie Chaplin video asking for funds to support the govt. during war, a scheme called "Liberty bonds" (nice name eh?)
Since then, borrowing money is no longer restricted to war. US Treasury routinely issues IOUs to fund itself. Currently, it owes 10 trillion dollars, of which 6 trillion has been "loaned" by other US government agencies/schemes themselves(!). The remaining 4 trillion is spread all over the world. The govt.s of Japan and China have a trillion worth of IOU papers between them and so on.
Firstly, I find it disgusting that lending to government is looked at as an investment option with triple-A rating, because government's job is not to make profits or safeguard money. There's also the moral hazard that government can be pressurized by large investors and countries (Btw, even individuals can lend via TreasuryDirect). You are essentially buying the government's immense powers of coercion and coinage.
By lending, you are also becoming a stakeholder in the economic progress of the country. You have to pray that GDP grows, inflation increases steadily etc. At least, US people should have created great assets worth buying if the govt. returns the money by printing instead of taxing. People with this view also believe that it's enough if the government just returns that year's interest and needn't bother about the long term. How is that accomplished? Simple: Issue more IOUs saying you want to borrow again today to repay old creditors (Not much different from a Ponzi scheme actually).
There are safeguards against issuing infinite debt. Once, the Congress had to approve every debt issuance. That proved tedious (naturally) and they now set a "debt limit" quota which is of course raised when required. In July, the debt limit was changed from 9.5 trillion to 10.5 to accommodate the $800 billion bailout.
Unfortunately these issues have become real concerns to the average US taxpayer now. In the below program targetted at US housewives and women, a guest from CNBC explains in layman terms the high stakes gambling their government is upto.
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