National debt

[otter (Premo)]

Originally Posted by Alexa

I was listening to a news station the other day. I think it was NPR. I like listening to the news on my way home and "roll the dial" so to speak (Givin' the old age away) until I get one that sounds like it is going over the days news.

Anyway, I caught the middle of the report, but it was stating that the Chinese has already begun asking questions about the debt. From what I garnered from the parts that I heard, they are beginning to worry themselves about our making good.

Any thoughts on that?

The US ought to give the Chinese all the bad paper they've taken from other countries over the last 60 yrs.

[chernmax (Premo)]

In 2012, Obama and Michelle will move to Africa and Obama will make millions on books about how he toppled Evil America!!! He needs this!!!

[Tilted]

Originally Posted by Pandora

Hey Tilted, you still feeling the same way about those bonds.

With regard to the risk of the government defaulting on them, yeah, I feel pretty much the same. Like I said though, I'm not suggesting that's not possible - just that it wouldn't matter anyway. If the U.S. government ever defaults on savings bonds, then likely, a whole bunch of other stuff will have already fallen apart and the U.S. currency (and probably all currency) won't be worth anything anyway. So, the only way to protect yourself from that possibility (and preserve the value of those assets), would be to put the money into something of enduring or tangible value (e.g. canned food, weapons, personal education).

Furthermore, and just for theoretical purposes, I think the government would default on Treasuries before it would default on savings bonds. And, for that to happen, it would have to not be able to issue new ones to cover the redeemed ones. As of right now, it still isn't having much trouble finding customers for the new Treasury issues. The Bid-to-Cover numbers of those auctions (a measure of demand for the debt) are still fairly strong. Those would have to drop significantly before we would be at risk of not being able to issue new debt.

All that being said, one of the conditions that I referred to in that post from February isn't true anymore. The yields for U.S. Treasuries are no longer way below those of British securities. The yields on long term U.S. securities are actually pretty close to the same as the British ones, and are actually higher than the German ones. In other words, it isn't fair to say anymore that the world trusts our long term debt a lot more than other people's. The world still prefers our short term debt, but doesn't prefer are long term debt as much as it used to. To be clear though, overall those yield rates are still very low and we aren't having trouble selling debt - but relative to other countries, they aren't as low as they were early this year.

The risk of default aside, are those savings bonds really old? I think they stop paying any interest after a certain number of years, don't they? I guess it depends on what series they are. I don't know if you know exactly what they are worth, but here is a site that can tell you exactly what they are worth today. I will say this about any dollar denominated asset - I think the risk of hyperinflation in the future is very real, and those assets might lose value because of that. When and if the economy heats up again, I'm not sure how it will be possible to avoid dangerous inflation with all of the 'money' in the system and all of the debt we've created. Frankly, I'm not sure what people can do to protect the value of their assets against that - TIPS (inflation adjusted U.S. Treasuries) may be the best answer for people who are really worried about it.

I rambled on, I know, I'm sorry.

[Tilted]

Originally Posted by Alexa

I was listening to a news station the other day. I think it was NPR. I like listening to the news on my way home and "roll the dial" so to speak (Givin' the old age away) until I get one that sounds like it is going over the days news.

Anyway, I caught the middle of the report, but it was stating that the Chinese has already begun asking questions about the debt. From what I garnered from the parts that I heard, they are beginning to worry themselves about our making good.

Any thoughts on that?

Yeah, I've got thoughts - but where to start?

I would say that the Chinese have cause to be somewhat concerned about that debt - but not really about us making good on it. What they are worried about, is that it will lose some of its value. They are (justifiably) concerned that our continued issuance of so much new debt and the potential, related, devaluing of the dollar, will reduce both the current value of the (U.S.) debt that they hold, and its effective value when it is redeemed.

Obviously, if the U.S. dollar loses value relative to other world currencies, then, when they redeem a certain amount of U.S. debt for U.S. dollars, those dollars won't have as much relative buying power.

But, there is another related dynamic. Anyone who owns a large portion of something, where the current market value of that thing is dictated by how much supply there is in the market relative to demand, has to be concerned about the market being flooded with too much new supply of that thing. If I owned 20% of all the copper in the world, and somebody suddenly found a bunch of new copper and brought it into the market, without a corresponding increase in demand for copper, then my copper would lose a lot value. Well, U.S. Treasuries are very trade-able instruments, effectively they are commodities. We are flooding the market with new supply. As of right now, there is plenty of demand to soak that supply up, so no problems yet.

But, the Chinese realize that at some point, when the global economy gets back on its feet, that demand will diminish (capital will have other places that it wants to go because it can make money there again, and the perceived risk will be reduced). So, the Chinese believe that our continued deficit spending will eventually create an excess market supply of U.S. debt, and thus significantly reduce the value of the U.S. debt they currently hold. A 30-year Treasury bond that they could sell today for $1.2 Million, might only be worth $.95 Million, when and if yield rates go back up (I haven't crunched the exact numbers, but that change would probably equate to an increase in the yield rate of around 1-1/2 % on a new, 30-year bond).

Now, in some ways that would be good for them - they could buy new U.S. debt cheaper (meaning they get a higher interest return on it). But, at the same time, they already own a lot of U.S. debt (something approaching $1 Trillion worth of U.S. Treasuries, plus other 'agency' debt), the value of which could drop significantly. To the extent that they eventually want to start spending that money, or investing it elsewhere, that possibility is worrisome. Hence, their expressions of concern in recent months about our fiscal situation, and the resulting effect on the value of their assets.

Now, all of that being said, it's hard for the Chinese to do much about the situation, other than expressing their concerns and hoping we take heed. As it is now, our economies are fairly co-dependent, and neither of us can quickly extricate ourselves from that co-dependency without causing a lot of damage to our own system and way of life. I commented about this aspect of the situation in a little more detail here, and in a lot more here. You can ignore the first half of the latter one, it's not really relevant, as the thrust of that conversation was a little different. Those posts are from March, and my perspective on the situation might be marginally different today - but not substantially so.

[Aerogal]

I read (somewhere -I'll have to search) that China, south american and other so called 3rd world govts are buying up percious metals (tianium, platinum, gold silver and copper). Not certificates or futures, but bullion. I totally agree with you on the tangible items. Bare necessities are what is going to be in demand and I wouldn't be surprised to see the urban and suburban areas imploding and violence against each other increasing for vital necessities.

[Pandora]

Originally Posted by Tilted

The risk of default aside, are those savings bonds really old? I think they stop paying any interest after a certain number of years, don't they? I guess it depends on what series they are. I don't know if you know exactly what they are worth, but here is a site that can tell you exactly what they are worth today. I will say this about any dollar denominated asset - I think the risk of hyperinflation in the future is very real, and those assets might lose value because of that. When and if the economy heats up again, I'm not sure how it will be possible to avoid dangerous inflation with all of the 'money' in the system and all of the debt we've created. Frankly, I'm not sure what people can do to protect the value of their assets against that - TIPS (inflation adjusted U.S. Treasuries) may be the best answer for people who are really worried about it.

I rambled on, I know, I'm sorry.

I have some nearing the 22-23 year mark, so they are getting close to the 25 year maturity. I started collecting savings bond very early in my working years and stopped a few years back investing in annuities instead.

I appreciate ALL your advice, so no complaint of rambling here!

With all that is going on with the U.S. right now, I was feeling a little insecure...... well... more than just a little.

[Tilted]

Originally Posted by Aerogal

I read (somewhere -I'll have to search) that China, south american and other so called 3rd world govts are buying up percious metals (tianium, platinum, gold silver and copper). Not certificates or futures, but bullion. I totally agree with you on the tangible items. Bare necessities are what is going to be in demand and I wouldn't be surprised to see the urban and suburban areas imploding and violence against each other increasing for vital necessities.

I don't recall reading anything recently about them buying up precious metals (that's not to say they aren't, I just don't recall seeing anything about it), but they are definitely hoarding various resources with industrial applications, such as base metals, iron ore and energy resources. They seem to be taking advantage of low prices to create large stockpiles of the materials that they will need in coming years to continue growing their economy, and increasing their position as an industrial power. They are also trying to increase their stakes in various Australian mining companies, and in so doing, have more control over their resource needs in the future.

In a way, this is also allowing them to diversify their reserve holdings a little (meaning, move some of their stored wealth out of U.S. backed investments and into more tangible assets). This is a trend that we need to watch carefully, but it isn't a cause for panic just yet.

[Tilted]

Originally Posted by Pandora

I have some nearing the 22-23 year mark, so they are getting close to the 25 year maturity. I started collecting savings bond very early in my working years and stopped a few years back investing in annuities instead.

I appreciate ALL your advice, so no complaint of rambling here!

With all that is going on with the U.S. right now, I was feeling a little insecure...... well... more than just a little.

You aren't the only one feeling a little insecure - there's a lot of that going around. People may differ on how dire they think our situation is, but, one thing is for sure - people need to be more diligent now, and give more thought to how they preserve the value of their assets, and secure their fiscal futures. It's not like people thought it was a few years back, where people just assumed most things were safe. Being heavily invested in savings bonds would seem to have worked out fairly well for you over the last couple years.

On another note, I was just reading a piece the other day about annuities (in particular, variable rate annuities). They used to be the red haired step children of the investment world - looked down upon by most that considered themselves savvy investors. But, it seems that they turned out to be rather fortuitous choices for those who were in them, especially if they had opted for guaranteed minimum return rates.

[Tilted]

I'm gonna post this here, because it kinda follows up on some of what was being discussed here.

Oil at $200, Stocks Can Keep Rallying: Jim Rogers

Investor Jim Rogers, a prominent commodities bull, said Thursday the U.S. government bond market will be the next bubble to burst due to unsustainable borrowing, and agricultural commodities and precious metals are among his favorite investment picks.

...

"The next bubble that I see developing is in the United States government bond market. It is inconceivable to me that anybody would lend money to the U.S. government for 30 years in U.S. dollars at 3 to 6 percent interest rate," he said. "So, somewhere along the line, this bubble is going to pop. If any of you own bonds, I'd be terribly worried, I would think about getting out of the bond."

Just to be clear though, he isn't suggesting the we are going to default on any U.S. Treasury Bonds (or shorter securities). And, what he is saying wouldn't apply to U.S. Savings Bonds, as they aren't marketable instruments.

[ImnoMensa]

Originally Posted by Tilted

I'm gonna post this here, because it kinda follows up on some of what was being discussed here.

Oil at $200, Stocks Can Keep Rallying: Jim Rogers



Just to be clear though, he isn't suggesting the we are going to default on any U.S. Treasury Bonds (or shorter securities). And, what he is saying wouldn't apply to U.S. Savings Bonds, as they aren't marketable instruments.

With a sure fire inflation about to hit, what good are savings anyway.?

Bad enough they arent earning a decent interest, Savings are about to get busted when the buying power of the dollar is halfed.