Government Bonds have an Effect on an Individuals Net Worth

From the more narrow perspective of personal finance or financial planning, government bonds are simply a particularly stable if low-return financial instrument, and therefore have the same positive impact on the calculation of net worth as any other investment or saving. However, from the broader perspective of citizens of the country, government bonds can be seen somewhat differently: as government debts, which are ultimately paid for by all taxpayers, even as the interest accrues only to a comparatively small number of bondholders in the private sector.

– About Individual Net Worth –

Net worth is, put at its most simple, the sum of a person’s assets minus that person’s liabilities (or debts). Assets include cash and other savings, including investments in mutual bonds, equities (stocks), and bonds. In general, financial planning involves maximizing net worth, first by reducing debts (to avoid paying further interest) and then by increasing investments, to earn growing amounts of interest over the course of one’s lifetime.

From the perspective of individual financial planning, then, government bonds are simply one of the asset components of net worth. Government bonds are a stable asset for investing purposes: they have long terms and typically pay a below-average rate of return, but do so with the full assurance that the government is far, far less likely to default on its debt obligations than a private corporation or a private individual is.

– About Government and Net Worth –

This previous statement, however, indicates another way of looking at government debts, from the perspective of a citizen and a taxpayer rather than solely as an investor. Where debt is concerned, one person’s asset necessarily is another person’s liability. The same is true of government bonds. Financial coverage refers to Treasury bonds being “sold” on the bonds market. In effect, however, these are not so much sales as loans: private-sector investors, especially institutional investors and foreign governments, loan the government money in exchange for a promised interest rate. The contract which seals this agreement is the “bond” itself.

As a taxpayer, then, one can see that we will end up paying for the bond eventually. If the government is going to pay off the investor from whom it has loaned the money referred to by the bond, then it has only three ways of doing so. First, it can simply print new money – which would lead to inflation, and which in general is not done, even though it would be entirely legal. Second, it can issue more bonds, in essence taking on new debt to pay off the old debt. This is both common and legal, but, just as taking out a cash advance on one credit card to pay off a second simply shifts your need to pay off the debt farther into the future, ultimately this is unsustainable. Ultimately, the government must turn to the third: collecting taxes to pay off its debts. In the final analysis, the citizens of a country must work off debt incurred by their government, and pay for it through their taxes.

From this perspective, then, government bonds actually have a negative effect on every individual citizen’s net worth. This is because, even if it is never stated explicitly in any official policy or law, every time the government issues a bond, it is creating a legal requirement by all citizens to pay off their share of that bond. Ultimately, the government’s assets and liabilities are the public’s assets and liabilities, so that when the government takes on new debt, that ultimately translates into more taxes paid by individual citizens. Governments usually prefer to cut services rather than raise taxes to cover debts, but the result is the same: either more money is paid into the federal coffers, or the same amount of money is paid in but less services are received in return.

In practice, there are two reasons why this unstated way that government bonds have an effect on an individual’s net worth is different for some citizens than others. First, some people pay more taxes than others, as a result of having higher income. These people therefore pay a disproportionately high share of the government debt. Second, however (and counteracting the first), these people are also more likely to hold government bonds themselves, or rather to invest in funds or corporations that hold those bonds. To the holder of a government bond, the income earned via interest payments will always be much greater than the minute percentage of the bond paid for through that person or group’s income taxes. This is why critics of the contemporary financial system refer to government bonds as a way of transferring wealth from the taxpaying public to a wealthy minority of large investors.