The flow of money in and out of the United States accounts for a percentage of the bottom of line of economic profitability over the short and long run terms. Savings bonds are a financial instrument that can and do influence the U.S. economy in terms of cash flow in and out of the country and in relation to the yield of those bonds. Essentially, when more interest is paid out to a foreign country then the net gain to an economy declines unless there is an equal or greater inflow of interest and/or income payments from a foreign source or through offsetting increase in annual national domestic production and economic expansion.
Types of Savings Bonds and their Owners:
Savings bonds may be Governmental or Corporate which is a significant distinction in terms of impact on the economy. If savings bonds are corporate i.e. from banks, financial institutions, or large company’s the money saved from those bonds does not generally exit the American economy unless those bonds are owned by non-Americans who reinvest the interest elsewhere.
Government bonds may be owned by foreign creditors i.e. governments seeking to balance their financial budgets, individual investors or financial institutions. Additionally, foreign government bonds may be owned by both the U.S. Government, and U.S. individuals and corporations. Consequently, the distinction of which bonds one is referring to is quite important in calculating the impact of savings bonds and on the U.S. economy.
The Cash Flow of the United States:
Until recently, the U.S. had more income from foreign investments than payments from investments in U.S. debt instruments such as treasury bonds. What this means is that unless other areas of the economy do not increase at a greater rate than the total amount of U.S. payments out, the net economic affect could be a shrinking of the U.S. economy and or loss of confidence in the ability of the U.S. Government to manage economic growth.
To illustrate the above points, if Gross Domestic Product increases at an average rate of 2.5% annually and the total annual payments the U.S. Government pays out is equivalent to 1.5% of GDP then the net GDP increase of 1%. Thus, a negative balance on U.S. treasury bond payments does not necessarily cause and mean a shrinking economy but does serve to slow it down.
Economic Factors that Cushion the Cost of Debt:
A low dollar can actually have a positive benefit on the U.S. national debt. The reasons being not only does a lower dollar shrink the trade deficit, it also makes the cost of payments on treasury bond interest lower in relation to the inflow from U.S. owned international bonds of higher currency value. For this reason it is important to realize that a seemingly large or negative inflow may not always be as terrible as it seems although a negative debt structure is generally not favorable unless that debt is financing a national economic expansion that is percentage points above what it would normally be without the debt.
Assessing the Variables:
To assess the overall impact of bonds on the economy they must be identified in terms of ownership and indebtedness i.e. what is the total U.S ownership of bonds in comparison to total U.S. payments on bond interest. Additionally, other economic indicators weigh in on the overall economic situation and those indicators are as listed:
*Trade Imbalance
*Budget Deficit
*GDP growth
*Bond Debt disparity
*Inflation
*Value of the Dollar
Essentially, the bottom line is does more money in terms of total value get generated and come in to the U.S. economy than goes out. To calculate the influence on bonds on this equation one must first identify which bonds one is discussing i.e. corporate, governmental or foreign, the ownership structure, interest rates and then calculate the net worth in terms of the U.S. economy.
Summary:
Bonds have some influence on the U.S. economy but are not a stand alone item in the numerical factors of econometrics i.e. economic measurements. Generally, if interest payments on foreign ownership of U.S. bonds is greater than U.S. ownership of foreign bonds, the net cash flow will be negative. However, this one value is not sufficient to determine the overall effect on the U.S. economy because as a percentage of total economic variables it may be small, relatively insignificant or marginally low. Even though a negative balance of payments may serve as a drag on economic growth it is not absolutely the case this must be so. The reason being, debt financing through bonds may be utilized to invest in a country, its people and the economy itself. If such investment yields a greater percentage growth return to an economy overall, that debt can be a positive influence an economy.