Government’s regulation and business

To ensure that the state of zero budget surpluses is maintained from all sectors, the governments have to use the fiscal policy, which is the manipulation of the budgets into surplus or deficit depending on the current economic status to achieve economic equilibrium. Budget surplus occurs when the government lends out surplus funds or print money for supply. Budget deficit occurs when the government spends more than the government revenue (tax) and budget surplus is the vice-versa. This occurs when the government, which has powers to prints new money and use it, decides to borrow funds to cover the deficit. Governments borrow through issuing of treasury securities in form of bonds, bills, and notes. These securities (bonds) are sold through auction and redeem them when they mature after 28, 91, or 128 days. In this transaction, the government debt results when all the treasury bonds issued have not matured. In some situation, the governments redeem mature bonds by selling new one where they only pay for the interest and rolls over the principle by selling new bonds and this result to annual increase of the government debt. One of the contributing factors to large debt is that governments cannot pledge collateral as individual lenders do. Economic conditions that favor these are that governments have the sovereign power to create unlimited amount of money, hence, cannot be bankrupt; they have the ability to pay its debt using the taxation powers; and that a government cannot end, (has no lifespan). This means that if the current citizens fail to pay their debt, then the future generation will bear all the burden of doing so. In this manner, they would have the responsibility of paying more taxes in order to pay the interest and the principle of those bonds. For an individual to get some relief of paying off bonds debt through taxes, they can save more and then buy treasury security that would earn sufficient interest to compensate for the debt tax payments. When considering such investment, it is important to avoid stocks because they are risky since cashing out involve willing buyers and the price depends on demand. In this manner, probability will determine the capital gain or loss of your investment. Nevertheless, treasury securities are usually secure and one should go for them when undertaking such investments. Treasury can also participate in bond business to reduce the debt that usually results from issuance of treasury security. For instance, treasury can issue those securities and buy them back at a discount before maturity, then hold them until they mature. The importance of this mechanism is that the government cash in the full face value of those bonds. Nevertheless, holding this debt may not be too risky since treasury can maintain on the current approach of replacing mature bond with new ones. Lastly, it is also important to consider that some of the bondholders are foreigners; therefore, the borrowed funds have to be efficiently used in order to produce maximum long-term benefits since paying of interests to foreigners for misappropriated funds negatively affect the economy.

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