Boy, this one is a shocker. CNBC is reporting that banks are being pressured into buying government debt (story here). They say that US banks have bought $700 billion worth of Treasuries since 2008. So what's wrong with this picture?
Let's drop down to the real world and take a look. You managed to save $1,000 and put it in a bank. You feel safe because of the FDIC or FSLIC insurance. After all, if the bank goes under, Uncle Sam will make sure you don't lose any money.
But, let's for a moment suppose that a few years from now the bank does fall on hard times. The people who they loaned money to can't pay it back. So they're closing the doors. You're ok, though, because the insurance has your back.
But, wait...there's more. You find out that part of the reason that the bank is having trouble is because the US Treasury can't repay the money they borrowed when they issued the $700 billion in bonds. Humm...could that be a problem for you?
You betcha! The same government that promised to guarantee your savings can't pay their own bills.
In reality it probably won't happen that way. If the government couldn't raise enough taxes to pay their bills they'll just run the printing presses. They'd issue enough dollars to cover their debts. So your savings would be secure. You'd still have $1,000 in the bank. The only problem is that you'll need that much to do your weekly grocery shopping.
So the next time you hear about government borrowing remember that it's your savings they're playing with.
