Wednesday, May 12, 2010

Either Engage Or Stop Whining

Yesterday was primary election day in Nebraska. Did you vote? I didn't think so. Less than 15% of voters turned out even though there were 79.3 million dollars worth of bond issues on the ballot for Omaha. What does that mean? That means that because all five issues passed, citizens of Omaha are now on the hook for another 79.3 million dollars worth of debt and they didn't even bother to go to the polls to voice their opinion.

When a city wants to raise, say $5,000,000 to buy new police cars for instance, there are two primary ways of accomplishing this. They can either hold a bake sale or they can issue bonds. Since bake sales rarely bring in more than $500, Omaha decided to go with bonds this time.

Bonds are really nothing more than IOU's . Investors buy the bonds in exchange for the promise of interest payments and all their principal back at a predetermined maturity date, usually 15-30 years down the road.

In our example, we are buying police cars. A police car has an average life of maybe two years before it is worn out because it is in use 24/7. In 2040, Omahans get to pay back the $5,000,000 they borrowed 30 years prior, for cars that went to the crusher 28 years ago. Ouch. Should have opted for the bake sale.

Back to my point. Only 15% of Omahans turned out to vote yesterday. Typically the folks that turn out for primary elections are the dyed in the wool Democrats or Republicans that will tromp through three feet of snow to vote because that is what they are supposed to do. And they Are supposed to do that. But so were you. Because your voice was not heard, our taxes will go up to pay for these bonds.

I was of the opinion that in a down economy, maybe this wasn't the optimum time to spend millions of dollars upgrading warehouses or city parks. I am quite certain I will hear people grousing about their local taxes in the coming year. I will not be a sympathetic ear.

People, at this point in history, YOU MUST ENGAGE politically. You Must be paying attention and participating. If you do not, terrible things will be done to how this country is ruled, dominated, taken over by power-hungry socialists. We are supposed to live in a small government republic with most direction coming at the state level. That is not what I see when I look out my window. Engage, people. Pay attention and learn the facts and let your opinions be known. It's time. It is your responsibility to do so.

4 comments:

  1. NY State and LA are both looking down the barrel of bankruptcy.

    IDK if I would be willing to put any money into municipal bonds in the current economic climate. To long run (I loves me some liquidity), and even if they were risk-free the rate of return barely ever meets inflation from what I understand.

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  2. Ah, Grasshopper. Much to learn. Wax on, wax off. Yes, indeedeo, CA and NJ and to some degree NY are in financial straits. They will have to fix their problems and reorganize in a more fiscally responsible manner. I am not particularly interested in donating my appropriately earned and saved money to bail them out. There's nothing new here, though.

    Municipal bonds, however, are another story. I most certainly would avoid CA & NJ munis for the time being unless they were paying a substantially higher yield and I had a high risk tolerance.

    Municipal bonds do indeed bear a lower coupon than a taxable bond but that is by design. A municipality such as a city or a school district may issue state and federally tax free bonds. If you are in a higher tax bracket, the taxable equivalent yield is usually quite attractive. So while you may receive a little bit less than a taxable corporate bond, after taxes, you may have More money in your pocket.

    One final thought. A municipality has the ability to tax its citizens to pay its debts. A corporation does not have that luxury. That is why you see AAA ratings on munis fairly often, but not as much on corporates.

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  3. Assuming the value at maturity is the same, is there a reason to prefer zero-coupon bonds over coupon bonds, or visa versa?

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  4. I assume you mean vice versa. Visa versa would be making an obscure foreign reference to a credit card.

    Normally, a bond pays interest during the life of the bond, frequently semi-annually. The value of the bond usually hovers near the face value and can usually be sold on any business day.

    A zero coupon bond does not pay interest semi-annually, but you are still taxed on the phantom income as if you were receiving interest payments. Instead of being worth approximately face value at any given time, they sell for a substantial discount and gradually increase in value until maturity.

    Someone averse to equities might buy a $10,000 zero-coupon (also called strips because the coupons have been stripped off) bond for $5,000 knowing the bond would be worth $10,000 at maturity, just in time for their grandkid's graduation.

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