Why I don't sympathize with holders of government debt F. Marc de Piolenc (piolenc@archivale.

com) Thirty years ago, people were ity and guaranteed yield, and ice. Now, people are wringing default, and wondering why I telling me to invest in government bonds for secur wondering why I was too stupid to follow their adv their hands over the plight of bond-holders facing don't sympathize. Let me explain.

It all comes down to the question of what is a government bond. For the sake of contrast, let's compare a typical "muni" or municipal bond, issued by a city gov ernment, with a bond issued by, say, a commercial bakery. Both are instruments of debt; essentially, the bondholders are lending money at an agreed rate of interest for a specified period to the organization issuing th e bonds. The key difference between them is in who contracts the debt, and who pays. When the Directors of ABC Bakery, Inc. vote to issue corporate bonds, they are, in effect, promising that at the appointed time ABC will repay the bonds' princi pal, plus the agreed interest, out of what they make selling dinner rolls and ci nnamon buns. If the appointed time arrives and the bonds are not repaid, ABC wil l be forced to repay them, and if they can't, to liquidate and pay off bondholde rs from the assets of the company. The directors who voted the bond issue, being shareholders in the firm, stand to lose all of their investment in that event. If irregularities are found in the bond issue or in provision for repaying it, t hey may even be civilly or criminally liable as individuals. All of these circum stances tend to promote prudence and forethought. When the City Council of Anytown votes to issue municipal bonds, on the other ha nd, the councilors are not incurring debt on their own behalf. Instead, they are promising the bondholders that, when the time comes, the Council will reach out and rob the taxpayers of the city of the amount needed to repay the debt. The c ouncilors are not themselves liable except as individual taxpayers, and there is no recourse against them in the event of a default. They have much to gain, and nothing to lose by a bond issue. In effect, they can buy their constituents' vo tes with the taxpaying citizens' own money. In other words, government bonds are a promise to steal. By any consistent stand ard, such a bargain would constitute criminal conspiracy. Unfortunately for the honest taxpaying citizen, this particular crime is sanctioned by the very govern ment on which he relies to suppress crime. And let's be very clear on this: trus t in government bonds is based on the fact that the taxpayer is not offered the option of not paying; he pays or else. This is no secret, and anybody who buys t his debt knows that it is being contracted on behalf of third parties, without t heir consent. In the case of long-term bonds, those who will be forced to repay them may not even be born yet. As a practical matter, and especially for the sake of political self-preservatio n, politicians avoid imposing special assessments or earmarked tax increases to cover bond repayment, and try to stagger bond maturities - all so that bonds can be paid out of current revenues. But now consider what happens when government revenues decline, as is happening nearly everywhere today. Faced with three alternatives: cut spending, raise tax rates or go deeper into debt, politicians typically dismiss the first alternativ e out of hand on the grounds that the people have a duty to maintain them in the manner to which they have become accustomed, reject the second because of polit ical risk, and eagerly embrace the third. Now, instead of using bonds for capita

l improvements and paying for them out of revenues, debt is being incurred to co ver shortfalls in the very revenue that is supposed to retire it. It doesn't tak e a degree in applied mathematics to know that this is unsustainable, and that a point will soon be reached where the INTEREST on the bond repayments will excee d revenue. These days, buying government debt isn't just a criminal act; it is also a stupi d one. Yet people continue to "invest" in this cynical bargain, apparently confi dent that somebody can be made to pay it off. And they wonder why I don't feel bad when it doesn't work out that way.