A Very Bad Idea Coming Soon to a City Near You

[Nuclear Unicorn]

9. If they cannot profit they will not put money in bonds

Bonds are how governments fund projects -- http://www.wesdschools.org/News.aspx?type=viewArticle&article=1365

On the federal level bonds are how the government can spend more money than it raises in tax receipts. If bonds were no longer sold you would see deficit spending evaporate overnight; something the GOP would love. And sorry, even if you defunded the DoD 100% -- a thin that pushes past absurd and politically suicidal -- you would only account for $665 billion. That's AFTER the Iraq withdrawal and includes gutting all vet benefits, etc. Even then it's only 1/3 of the annual $1.7 trillion dollar deficit.

Deficit. Not overall budget; but only 1/3 of the deficit.

We need bonds unless we want to slash education, Medicare, social services, EPA/FDA/OSHA regulation enforcement, etc by 55% overnight.

And bonds aren't even profitable. All they do is offer a hedge against inflation. Bonds *are* the inflation rate. That 2% rate of return is the 2% inflation rate for the consumers. Most investors try to make Profit = (investment + return) - inflation. All the bond buyer did was break even. Tax them and suddenly bonds become auto-loss instruments. If the market dries up the rate of return climbs until people start buying them. That makes everything more expensive down the line for the consumer and dries up the credit markets.

Municipal bonds are even trickier. The feds will always be there but municipal governments can actually disappear if the city's population/economy (read: tax base) fades away. A city can say, "We have 100,000 people each taxed at a marginal rate of 5%. We grow plus 2% population every 10 years ergo we surmise tax receipts of X in Y years." But if the local economy goes toes-up those calculations become moot. If the pensions were funded on promises-only the retirees can howl day and night but the money won't be there. You can't squeeze blood from a stone, regardless of how much you tax the stone.

If you had to choose between schools and sewers here and now vs. retirees you can instantly see the issue. No schools or sewers means destroy your city. What do you use to pay your retired employees then, even if only half of what you promised?

The solution isn't to punish bond-holders, and the schools, roads and seweres they fund. The solution is to compel anyone offering a pension to have cash-on-demand in the bank to cover those pensions. Basing pensions on assumed 8% ROIs is a practice no SEC-governed entity would be allowed to lawfully claim. That way the bond-holders are 1 set of transactions and the pensioners are separate and segregated -- insulated, if you will -- from the economic tides.