Jack TenneyExtra Point

by Jack Tenney, Publisher

August 2011

Debt? Did someone say debt?
When you go to town meeting, one of the first things you’re asked to vote on is the authorization of tax anticipation notes (TANs). What that’s all about is — or used to be — arbitrage.

A town borrows using its future tax receipts as collateral to invest in short-term notes with rates yielding at marginally higher rates than are due on the TANs. Although there is a representation that the purpose is not arbitrage, it really is pretty much arbitrage.

All this debt stuff at the government levels (town, city, county, state, and federal) is, in the end, sound fiscal management. You and I, brothers and sisters, would be guilty of unsound fiscal management if we started out each year borrowing the limit of our credit lines in order to invest in short-term notes and the like.

The difference between us and them — well, for one — is the fact that we pay taxes on our income.

We don’t, however, pay taxes on our borrowing, but under most reasoned schemes may deduct the interest on the borrowing. That fact explains a lot of what caused the real estate bubble, right?

Using “lazy” collateral (the equity in our homes), we could generate tax-free cash, pay only the interest, and get a tax deduction. Only when we cashed out would the second mortgage (plus the first, third, and closing costs) be paid off.

Now a suggestion going around is that no one — not you, me, or the government — should borrow money.

Businesses? No; no one is suggesting that businesses shouldn’t borrow money. In fact, if you checked out which public companies had the best return on capital, you’d find that the ones with the most debt are the winners. 

All right; the deal is, with the exception of businesses, all entities should pay cash.

So ... I’m saving up to buy a car, go on vacation, see a dentist — big-ticket items. Lots of folks, governments, and even businesses are doing the same (saving their cash, not necessarily skipping dental  appointments.) 

The bottom line of lower borrowing, spending, and tax receipts makes for a pretty slow August.

So what else is new?