Cross-Posted on Stock Picks Bob’s Advice:
A few days ago I discussed how I was looking into an iBond. So I visited my local Wells Fargo Bank and purchased a $5,000 bond for a long-term investment. And the more I thought about, the more I became perplexed about this new limit on individual savings bond purchases each year.
As reported by Chris Farrell on American Public Media “Marketplace”:
“I think it’s a terrible move. Here’s the breakdown: Savers can now buy a total of $20,000 in U.S. savings bonds. That’s $5,000 each of Series EE (the traditional savings bond) and Series I savings bonds (the inflation-indexed security you mentioned) online and another $5,000 each in paper. In sharp contrast, before the turn of the year individual savers could sock away a total of $120,000 in U.S. savings bonds.
The shift is even more significant than these dollar figures suggest. The change makes it that much harder for individual investors to hedge a substantial portion of their savings against the ravages of inflation over time. Yet many finance scholars advocate that inflation-indexed bonds should be the foundation of a long-term retirement portfolio. The big attraction for individuals of the inflation-indexed savings bonds is that savings compound tax deferred until the bonds are cashed in a 30 year period. Plus, you don’t pay any commission to buy and sell savings bonds.”
I just don’t get it.
We are in a war in Iraq and Afghanistan. And it is costing us plenty.
As reported on March 9, 2008, from the Associated Press:
“In 2008, its sixth year, the war will cost approximately $12 billion a month, triple the “burn” rate of its earliest years, Nobel Prize-winning economist Joseph E. Stiglitz and co-author Linda J. Bilmes report in a new book.
Beyond 2008, working with “best-case” and “realistic-moderate” scenarios, they project the Iraq and Afghan wars, including long-term U.S. military occupations of those countries, will cost the U.S. budget between $1.7 trillion and $2.7 trillion — or more — by 2017.”
I really don’t get it.
On June 12, 1944, President Franklin D. Roosevelt had a ‘fireside chat’ with Americans and he spoke to us about the need to buy bonds to finance the war effort.
“And it goes almost without saying, too, that we must continue to provide our Government with the funds necessary for waging war not only by the payment of taxes- which, after all, is an obligation of American citizenship—but also by the purchase of war bonds- an act of free choice which every citizen has to make for himself under the guidance of his own conscience.
Whatever else any of us may be doing, the purchase of war bonds and stamps is something all of us can do and should do to help win the war.
I am happy to report tonight that it is something which nearly everyone seems to be doing. Although there are now approximately sixty-seven million persons who have or earn some form of income, eighty-one million persons or their children have already bought war bonds. They have bought more than six hundred million individual bonds. Their purchases have totaled more than thirty-two billion dollars. These are the purchases of individual men, women, and children. Anyone who would have said this was possible a few years ago would have been put down as a starry-eyed visionary. But of such visions is the stuff of America fashioned.”
But I am not really surprised. Shortly after 9/11, President Bush delivered a speech designed to rally the nation behind the war effort. But he didn’t really ask for much sacrifice or the purchase of war bonds like FDR. Instead, he called on the American Consumer to….yes…go shopping!
“After all that has just passed, all the lives taken and all the possibilities and hopes that died with them, it is natural to wonder if America’s future is one of fear? Americans are asking, ‘What is expected of us?'”
He then answered his own rhetorical question with a line Americans wanted to hear.
“I ask you to live your lives and hug your children.”
He could have stopped there — a gem of a line, a Hallmark-card-sized summation of the littlest and best things we can do — but when American shores are smoldering still, Bush must have realized that more couldn’t hurt. Be calm, not scared; be tolerant, not blind; be generous, not selfish; be patient, patient, patient, at airports and skyscrapers and landmarks and hotels and traffic stops and bus stops and train stations and anywhere else it is possible to imagine a public vulnerability, which of course is everywhere.
And for God’s sake keep shopping — “I ask your continued participation and confidence in the American economy” — and keep praying:
“And finally, please continue praying for the victims of terror and their families, for those in uniform and for our great country. Prayer has comforted us in sorrow and will help strengthen us for the journey ahead.”
For God’s sake keep shopping? Is that the best he could do?
The Brookings Institute carried a comment about the effect of foreign ownership of debt:
“Many observers are asking whether U.S. indebtedness to foreigners might pose any subtle hidden threats to the U.S. economy or even to U.S. national security. With China alone holding $1.2 trillion in reserve assets and foreigners collectively holding more than twice that in U.S. Treasury securities, is there any risk that the United States might be subject to economic blackmail? What about the rapid proliferation of so-called sovereign wealth management funds, most famously China’s $3 billion investment in the private equity group Blackstone? Sovereign wealth funds now control nearly $2 trillion in assets, more than stand-alone hedge funds. Is there a risk that foreign governments will use their financial relationships to compromise U.S. security? Is there any danger of exotic “Goldfinger”-like scenarios where foreign governments might use their massive leverage to precipitate a wholesale financial collapse in the United States? The short answer is these more extreme risks are unlikely to materialize, but the United States continued dependence on foreign borrowing is a significant vulnerability in the event of shock, such as a collapse in U.S. housing prices, or an extreme national security breach, that might slow the inflow of new funds into the United States.”
So how does the Treasury Department explain the new rules as of January, 2008, that reduced the maximum annual purchase of savings bonds from $120,000 to $20,000 per individual? Is there not enough debt to go around? Do we need to ration the opportunity of Americans to invest in their own government? Is the concept of Americans buying Savings Bonds in the time of war obsolete, or to quote Alberto Gonzales, “quaint”?
The budget deficit problem is not improving.
In fact, our deficits are actually growing as the economy slows. As reported on February 12, 2008:
“(AP) The federal budget deficit is running at a pace that is more than double last year’s imbalance through the first four months of the budget year.
In its monthly review of the government’s finances, the Treasury Department said Tuesday that the budget was in surplus in January, but totals $87.7 billion so far this budget year, double the $42.2 billion imbalance recorded during the same period in 2007. The new budget year started last Oct. 1.
The Bush administration sent its final budget request to Congress last week, projecting that the deficit for all of 2008 will total $410 billion, very close to the all-time high in dollar terms of $413 billion in 2004.
So far this year, federal spending is 8.3 percent ahead of last year’s pace, at $949.1 billion. That is far ahead of the 3.2 percent increase in revenues, which have totaled $861.4 billion in the current budget year.”
So I guess they aren’t cutting back on the purchases of Savings Bonds and iBonds by individuals because there isn’t any debt that needs to be funded.
So what is the explanation given?
Here is the Treasury Department explanation given on December 3, 2007:
“The annual limitation on purchases of United States Savings Bonds will be set at $5,000 per Social Security Number, effective January 1, 2008. The limit applies separately to Series EE and Series I savings bonds, and separately to bonds issued in paper or electronic form. Under the new rules, an individual can buy a maximum of $5,000 worth of electronic and paper bonds of each series in a single calendar year, or a total of $20,000, in single ownership form. If paper bonds are issued in co-ownership form, the limit applies to the first-named co-owner. All limits are based on the issue price of the securities.
The reduction from the $30,000 annual limit in effect for both series since 2003 was made to refocus the savings bond program on its original purpose of making these non-marketable Treasury securities available to individuals with relatively small sums to invest. Approximately 98 percent of all annual purchases of savings bonds by individuals are for $5,000 or less. The minimum purchase price for Series EE bonds is $25, whether purchased electronically or in paper form; the I bond minimum purchase is $25 for bonds issued in electronic form and $50 for those in paper form.
Savings bond purchases have been subject to an annual limit since Series E Bonds were first issued in 1941. Over the years, limits have been adjusted by the Treasury Department several times and have ranged from a low of $3,750 (at issue price) for Series E bonds from 1941 through 1947 to the $30,000 (issue price) limit that most recently applied to both Series EE and Series I bonds. The limit was last set at $5,000 (issue price) in 1973.”
So in their words, the reason they are reducing the ability of Americans, in time of war, to buy savings bonds is because they wanted “to refocus the savings bond program on its original purpose of making these non-marketable Treasury securities available to individuals with relatively small sums to invest.”
O.K. I still don’t get it. The government would somehow rather borrow from foreign governments and foreign investors than sell savings bonds to individuals.
Is this what patriotism is all about?
Maybe I am missing the point, but I somehow like the old FDR approach of asking Americans to sacrifice and to buy savings bonds so that we all together can share in this effort. For this Administration, it has been a better approach to sacrifice by ‘going shopping’. Or better yet, this President has sacrificed in this war effort by ‘giving up golf.’
And I just wanted to buy more than one savings bond.
Yours in investing,