Thursday, November 2, 2023

What is the value of a treasury bond?

 How would you measure the intrinsic value of a treasury bond?  So here is my idea.  Assume that 10% of all future tax revenue is dedicated to paying the principal and interest on bonds (and the other 90% is used to pay expenses).  This would assume that the budget is actually balanced and not that the country is going deeper into debt every month.  Anyways, we can project the future tax revenues (see my last projection), and I go out 30 years (2024-2053), and then figure out the present value of this number, assuming a 5% rate and a single payment per year.  The present value I come up with is $12.688 trillion.  Now compare this to the marketable debt outstanding, which is $26.58 trillion as of 10/31/23.  So this means that the actual value of a treasury bond is only 48 cents on the dollar.  The other 52 cents can be covered only by issuing new debt, and if the Treasury for some reason couldn't issue more debt, but could keep taxing people, then only 48% of it would be paid.

I don't know if this is an accurate way of valuing it, but it is an interesting idea to think about.  So the whole thing definitely is a Ponzi scheme assuming that you can issue new debt to infinity.  Question - what is the largest Ponzi scheme that has ever collapsed?  Bernie Madoff had a $20 billion scheme going and that appears to be the biggest.  Were there any bigger?

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