Saturday, July 30, 2011

U.S. Debt Woes Mount

It seems as if the United States' debt problems are coming home to roost.

The current conflict in Congress about raising the debt ceiling while putting a plan into place to cut the country's long-term debt shows how dysfunctional America's political system has become.

What will come out of all of this political rancor?

Most likely, a muddle through compromise will be brokered over the next several days. This compromise no doubt will raise the debt ceiling while making token, 'smoke and mirrors' cuts in the nation's debt.

Any token cuts made will be offset by the downgrade to the United States' triple-A credit rating by the credit rating agencies. Surprisingly to me, the rating agencies actually seem to be serious about the downgrade and giving the US a more realistic credit rating.

It is almost laughable seeing all the Wall Street talking heads on the financial news networks saying that the downgrade would be “meaningless”.

The downgrading of US debt would have very meaningful effects.

For example, there are many financial institutions around the globe such as pension funds which are only permitted to own triple-A bonds. This means if US government debt is downgraded to say AA, these institutions would be forced to sell all of their US Treasuries.

Needless to say, this would cause a steep sell-off in US Treasuries and other government-backed bonds.

The recent Wall Street reaction to this debacle shows once again the stupidity that runs rampant in the US financial industry today and passes for “street smarts”.

With a few notable exceptions like Pimco's Bill Gross, what do you think the geniuses on Wall Street are doing in reaction to the pending problems in the Treasury market? Why, of course, they are liquidating other assets and putting the proceeds into the “safe haven” of US Treasuries.

Huh? Did I miss something? Isn't the problem with US government debt?

There is a problem with US Treasuries, so you naturally go and buy more of them. Think of it this way – a nuclear blast has gone off and the geniuses on Wall Street, instead of fleeing, are running full speed towards ground zero. With the money you've invested I might add.

If you're an individual investor who invests on your own, what should you do?

Many of you may recall that I have been telling anyone who would listen to get out of US Treasuries for many months now. It is a bubble waiting to burst.

There are many other government bonds and currencies around the world which are much safer than US Treasuries and the US dollar.

The list of safer countries includes: Germany, Switzerland, Sweden, Norway and Australia. Even France, Canada and New Zealand aren't bad.

There are ETFs traded on the stock exchange which allow you to buy German or Australian government bonds, for instance. And Australian bonds pay about 5% too!

1 comment:

  1. The debt problems for the united states are now getting out of hand. Whats really disturbing is the lack of solutions to what is the countries most serious problem.