Have you ever stopped to think how the government manages to pay its bills? Where do you get the money to finance your projects, such as education, health or defense? And how do you go about borrowing when you run out of money? Of course, taxes, those friends who take a good chunk out of our salary..
But it turns out that the government is a bit of a spender and usually spends more than it has. And then he has to go into debt to plug his holes. And how does it do it? Well, by selling bonds in the bond market. The bond market is a place where the government offers IOUs for money to investors who buy them. Thus, the government gets fresh money and investors a return on their money. All very nice, right? Not always.
Bonds are little pieces of paper that the government sells to investors in exchange for interest. That is, the government tells them: “I give you this now and you give me more later.” This is how he gets credit to finance his projects or his wars. But bonds aren’t just a government thing. Companies and individuals can also issue bonds to borrow money. And bonds can be bought and sold among investors, creating a huge, global market.
For example, a company that needs money to expand can issue corporate bonds, which are bonds that promise to pay fixed or variable interest to buyers. These bonds are riskier than government bonds, because the company may go bankrupt or default. For this reason, they usually offer a higher return to attract investors. Corporate bonds can be traded on stock exchanges or in the secondary market
Let’s go back to history. In Italy, for example, city-states like Venice or Florence were the pioneers in issuing bonds to finance their constant wars. In fact, they forced their citizens to lend them money in exchange for interest. And then they allowed those bonds to be sold to other investors for cash. This is a real life case. Thus the bond market was born.
In northern Europe, bonds took other forms, such as annuities or lottery loans. Annuities were a way to buy a series of annual payments for a fixed amount. Lottery loans were a way of investing in the small chance of getting a big return. Both forms were successfully used by France and the Netherlands to finance their expenses.
When the Glorious Revolution of 1688 brought William of Orange to the throne of England from Holland, these financial methods spread to Great Britain as well. There the Bank of England was created, which was in charge of issuing government bonds and managing its debt. The bank also lent money to the government in exchange for future taxes. Thus a symbiotic relationship was created between the bank and the government, allowing them to finance wars and projects without relying on foreign lenders.
In the United States, bonds also played a crucial role in its history. From independence to the civil war, through the Louisiana purchase and the construction of the railroad, bonds were a way to raise money to expand and develop the country. But there were also difficult moments, such as when some states defaulted on their bonds or when there was inflation and the depreciation of the dollar.
However, the bond market has evolved over time, adapting to historical and political circumstances. In fact, the price and interest of the bonds reflect the risk and confidence that investors have in the issuer. Because not everything is rosy. There are dangers in borrowing through bonds, both for governments and for companies and individuals.
Of course, the bond market is not just a matter for experts or speculators. It affects us all, because our pension or retirement plans invest in it, and because it determines long-term interest rates for the entire economy. Therefore, it is important to understand how this market works and how it can influence our future.
The bond market will surely continue to be a source of credit for governments and companies, but it is also a threat to their solvency. Are they a form of slavery or freedom? Progress or decadence? Security or risk? The answer is not easy, but what is clear is that bonds are an essential part of the modern economy.
Can you imagine that the United States could not pay its debt? Well it could happen. Right now, Uncle Sam owes more than $31 trillion and needs permission from Congress to keep spending. But the politicians do not agree and the term ends in June. If they don’t, the government will run out of money to pay its bills. And that would be a very big mess.
Because? Because the debt of one is the asset of another. There are many people who have lent money to the government: banks, companies, citizens and foreign countries. If the government doesn’t pay them, they will get very angry and lose trust in it. And that can affect the global financial system. Because if nobody wants to lend more money to the government, it will have to cut spending on important things like education, health or defense. And that will hurt the economy and the well-being of Americans and many. Furthermore, the dollar will be devalued and lose its value as an international currency. And that will make everything more expensive and difficult for everyone.
It is essential that politicians come to an agreement and act responsibly. Otherwise, the situation can become very serious. What will happen? It is difficult to predict, but you have to be alert. Faced with such extreme political polarization, conservatives are likely to resist to the end. And that will generate more uncertainty and conflict. Dogmatists are stubborn, but not suicidal. Sooner or later, conservatives, to avoid disaster, will have to give in and listen to reason. Let’s ask heaven for a miracle.
Disclaimer: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information presented here should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
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