This post was edited by sansukong at 2012-6-8 17:59|
Part: 2 of 2
14 Risks of Holding U.S. Government Treasury Bonds
Risk #8. “Mandatory outlays for retirement insurance and health care are expected to increase substantially in future years.”
The Treasury itself estimates that the present value of future social insurance expenditures — such as Social Security and Medicare — is $46 TRILLION! And that’s AFTER subtracting future revenues the government will collect on those programs.
Risk #9. “Ratings agencies may withdraw or downgrade the U.S. government’s current AAA/Aaa rating without notice.”
Moody’s has already warned that, unless major debt reduction measure are put into place, or unless the economy is a lot stronger than expected, the U.S. government’s triple-A rating may be in jeopardy.
My view: If the rating agencies fail to downgrade the U.S. Treasury department, global investors will take the initiative and effectively put into place their own downgrade — by demanding yields that correspond to lower rated bonds.
Risk #10. “The U.S. economy is heavily indebted at all levels, despite recent de-leveraging.”
Total credit market debt in the U.S. was $52.6 trillion at the close of last year’s third quarter — 369 percent of GDP, the highest ever.
Risk #11. “The increase in government debt as a result of the financial crisis in advanced countries may lead to greater concern over sovereign debt.”
Due to the Greek crisis, global investors are seriously questioning the security of other sovereign debts, especially in nations with shaky budgets and huge deficits.
Even if no major country defaults, these fears could drive up borrowing costs for any government associated with poor fiscal controls and other risks — like those we’re talking about right here.
Risk #12. “U.S. states and municipalities are experiencing severe economic distress and may require intervention from the federal government.”
Forty-one states are facing budget shortfalls in 2010, according to the Center on Budget and Policy Priorities. This poses a threat to federal finances whether Washington decides to bail out certain states or not.
If Washington bails out the states, it will be on the hook for even more money. If it fails to bail out the states, the state cutbacks could threaten the economic recovery, delivering more fiscal troubles to Washington anyhow.
Risk #13. “Elected officials may not take the necessary steps to ensure long-term debt sustainability and may take actions counter to the interests of bondholders.”
There’s no political will to fix the problem. If anything, politicians have proven that they are more than willing to take steps that make it worse.
Risk #14. “A rise in interest rates could adversely affect government finances.”
Right now, Uncle Sam is getting a bargain with low interest costs. But the combination of chronically massive deficits and these 14 risks make continued low interest rates an almost unimaginable scenario. At 6 percent, the government’s interest expense would surge from $187 billion to $528 billion; at 8 percent, it would be $704 billion. Just for interest! Strictly in one year!