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Proposal for U.S. Treasury Securities.

U.S. Treasury Securities are bonds or debt instruments that are issued by the federal government with maturities (or pay off dates) of a few days up to 30 years.  Here is a link for more information about Treasury Securities.  Treasury Securities are a good investment if you buy them and intend to hold them to maturity because the risk of default is very low.  However, recently, the market for U.S. Treasuries has been a little roiled for several reasons: a) the huge amount of Treasury Securities that will have to be issued to fund government spending; b) potential increase in inflation some time in the future; and c) rumors and talk of China divesting itself of Treasury Securities.  This proposal may address the supply/demand issues related to U.S. Treasury Securities. 

This proposal is not my idea but one I read about in the Financial Times.  I believe it is a good one.

Right now the biggest challenge for U.S. Treasury Securities is one of supply/demand.  Supply because the U.S. Treasury will have to issue huge amounts of Treasury Securities to support government spending.  There is a big concern that the supply of Treasury Securities will overwhelm the market.  This would cause prices on Treasury Securities to fall which in turn would cause bond yields and interest rates to go up because of bonds inverse relationship between price and bond yield.

Demand is an issue for several reasons.  First, is when the stock market starts improving big institutional investors such as mutual funds tend start taking more risks in the stock market and shy away from purchasing lower yielding less risky Treasury Securities.  Second, and this is a big one, China, the largest foreign owner of Treasury Securities, has been talking about buying fewer Treasury Securities.  In fact, it appears that they may be changing their purchasing strategy by buying shorter-term more liquidity Treasury Securities.

So, how does this impact us?  Well, it impacts us in several ways: 1) as a taxpayer and 2) as a consumer.  As a taxpayer, if the price of Treasury Securities falls because of increase supply and/or decrease in demand prices on Treasury Securities goes down and bond yields or interest rates go up.  Meaning that the federal government would have to pay higher interest costs on federal debt - obviously not good.  As a consumer, bond yields/interest rates on Treasury Securities is a big factor in determining consumer interest rates particularly mortgage interest rates.

Here is the proposal:

1) Make interest payments on Treasury Securities Tax-Exempt from Federal Income Tax.  Currently, a U.S. taxpayer has to include any interest payments from Treasury Securities as income for tax purposes.  Foreign investors, such as China, earn interest payments tax free.  There is also some back-door double taxation or something circular about the inclusion of interest payments as income for tax purposes because we are paying income taxes to fund government spending and we have pay taxes on the income we earn from owning Treasury Securities.  There is definitely something circular about that.

2)  Open up or widen the sale of Treasury Securities to Individual Investors.  Treasury Department does have a good website that allows people to open accounts and purchase Treasury Securities but the website has its limits.  What about allowing banks, credit unions, grocery stores and even possibly post offices to sell Treasury Securities. 

This proposal may increase the demand and market for Treasury Securities at a crucial time in our history.  Plus, this may help with our continued personal saving rate as a country.  What better way to safely invest our money but right here in the U.S.  Our children and grandchildren may thank us for it.

Good luck.