This remind you of anything?
March 14 (Bloomberg) — Oil exporting countries are cutting holdings of U.S. government debt as energy prices rise, helping depress the dollar, the worst performing major currency of the past six months.
Treasuries owned by oil producers and institutions such as U.K. banks that are proxies for Middle East nations fell 9 percent in the second half of 2010 to $654.6 billion, the first decline in the final six months of a year since the Treasury Department began compiling the data in 2006. The sales may continue, if history is any guide, because Barclays Plc says Middle East petroleum exporting nations have traditionally placed only 25 percent of their savings in dollar-based assets.
PIMCO, OPEC: not buying what we’re selling.
And does anybody think that the No. 3 U.S. government debt buyer, Japan, is going to be in the market for a while?
Here’s a little piece of knowledge:
“I moved my clients out of any mutual funds that held Treasuries 12 to 18 months ago, including the Pimco Total Return Fund,” said Steven Tibbitts, owner of Tibbitts Financial Consulting, a $50 million advisory firm.
In place of Treasuries, he has moved clients into floating-rate-bank-loan funds and international bonds, including emerging-markets debt.
“It’s not a matter of whether rates rise, because they will, and when they do, it will be negative for longer-term bonds, especially longer-term government bonds,” Mr. Tibbitts said.
Question: Who thinks the U.S. government will still have a AAA rating in five years? Answer in the comments and tell me why/why not.
— Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, just published by Regnery. You can buy an autographed copy through National Review Online here.
I think our AAA rating will be retained simply because there are no other alternatives to an international currency. That doesn't mean we are in great shape, but that all the other major players are worse off.
What matters is what interest rate will the government have to offer in order to sell those T Bills to fund our deficit without the Fed printing moneny to buy them?
In five years, I believe we will be in Jimmy Carter territory of 11-14%. This along with being well into the baby boomers drawing down on SS/Medicare will put us in a not so happy place.
I can't see a way out with Obama in the White House and even if he is defeated in 2012 the cake is already baked.
I wish I had something positive to say.
Reply to this commentLinkReport AbuseSeeing as how the rating agencies have been found in bed with the bankers, I imagine we will still have a AAA rating. However, it will be just as meaningless in 5 years as it is now.
Reply to this commentLinkReport AbuseThe most irritating thing I've read is how the New York Reserve president Dudley tried to make an audience in New York feel better about undeniably rising food and energy prices (you know, part of that pesky irrelevant 'headline inflation' that the Fed disdains to be worried about) by saying that the "new Ipad2 is twice as powerful as the Ipad1 and the price is the same!" As if the ability to twit or facebook at double speed has anything to do with the real concerns that real people have ... This is what passes for competent leadership at the rudder?
Interest rates (along with food and energy prices) are going to go up significantly. One way individual investors have an opportunity to protect themselves financially is by betting against the price of US Treasury bonds (buy shares in an ETF that shorts US Treasuries).
Reply to this commentLinkReport AbuseThe U.S. will retain its AAA rating for one, very simple, reliable, but not very comforting reason: U.S. government debt is denominated in U.S. dollars and U.S. dollars are a fiat currency (which may or may not be a good idea, but that is not the point here).
The piece of paper labeled a U.S. government bond entitles you to nothing more or less than to receive other pieces of paper labeled U.S. dollar bills. (Or, equivalently, if somewhat more sophisticatedly and realistically, to have corresponding annotations made in the federal reserve's accounting system).
As the Fed can print any number of the pieces of paper labeled dollar bills at almost zero cost (or make the equivalent accounting entries at exactly zero cost), the U.S. government will never have to default and hence is practically guaranteed not to do so.
Only entities owing money in currencies they do not control can be forced into default (e.g., states owing U.S. dollars, E.U. members owing euros, private companies owing U.S. dollars, south american banana republics owing debt denominated in U.S. dollars). As the U.S. government does not owe any non-trivial amounts in anything but U.S. dollars, it will not default.
Bottom line: Worry about high (or even hyper-) inflation when the bills come due. Do not worry about default.
Reply to this commentLinkReport AbuseThe question is quite simple. Does anyone think that a 30 year bond paying short of 5% will be marketable in 20 years for anywhere near what you paid for it?
Reply to this commentLinkReport AbuseKevin:
In five years, "AAA" won't matter because the credit-rating agencies will have been reduced to irrelevant newsletters anyway by the insidious--and justified--workings of Dodd/Frank.
Reply to this commentLinkReport AbuseI don't own any T-bills and would be happy for the Treasury to stop selling our debt. I'd like to see us pay off all our foreign creditors and never sell debt to foreign investors again. I suspect we will still have a AAA credit rating in five years through no fault of our own, but only because everyone will seem worse, and Moody's may decide to grade on a curve, as it were.
If our money is not valued by other countries, we still grow food, which is something everyone needs. Ultimately, human beings can live without oil and the modern conveniences powered thereby, but they cannot live without food. If they can't grow it, they'd best we willing to barter for it. I'm in favor of some amount of charity even if it means giving some food away, but not so that some government can put more money into other pursuits since it isn't feeding its own people. I wonder if we could trade food to North Korea in exchange for immediate delivery of all its nuclear material. Guns for butter, as it were.
Reply to this commentLinkReport AbuseCarlEdman is right that Treasury debt carries zero repayment risk because we can print the dollars to pay back the bonds. However, the ratings firms are on record as saying the AAA rating will not be granted if the nation's debt service takes up more than 15% (I think) of the federal budget. We have financed most of our recent trillion dollar deficits at very short term rates which are currently close to zero. Once the Fed normalizes rates the debt service of the already existing debt will likely reach that threshold and all the added debt put on top may drop it below even AA.
Reply to this commentLinkReport AbuseGiven the specified five year time frame I answer your question with a whole-hearted and unqualified "maybe." All joking aside it all depends upon what happens in Congress over the next three years and the results of the of the 2012 elections. If I were a betting man, I would say there is a 75% chance that the rating will be downgraded.
If the current House continues to attempt to follow through on the conservative beliefs that were professed during the last election, with the Republican minority in the Senate standing firm, if during the 2012 elections Republican majority is elected to both Houses of Congress, along with a Republican president, and the initial actions of Congress in 2013 are to roll back spending to no more than the 2006 levels, then I would expect the AAA rating to remain solidly in place. This would especially be true if, during the next two years, serious effort is put into drafting entitlement reform legislation and that legislation is quickly passed by the 2013 Congress; in which case the rating might actually be upgraded.
However, if instead of maintaining an united front, the Republicans devolve into their usual desire to be Sally Field and have everyone "like them" then I would expect the current rating to be downgraded within the next year. Also, if the Republicans promote a RINO candidate, for the 2012 Presidential election, and Obama is then re-elected, I would expect an additional downgrading of the USA's credit.
I already see portents that the Republicans are going to cave.
* In Wisconsin, one Republican defected on the collective bargaining vote and I haven't heard of any unified support there for recall elections of the "Fleebagger" Democrats.
* In Congress, another CR was passed with relatively minor cuts that already had Democratic approval.
* The traditional Republicans were fighting with the Tea Party faction over what $100 billion in cuts actually meant.
* A report is delivered on duplication of effort in the Federal government and it disappears into a black hole.
* Republicans are already talking defensively about a government shutdown, rather than unifying behind a single message of fiscal sanity.
Overall, I'm having a Derbyshire moment and feeling doomed.
Reply to this commentLinkReport AbuseY'all are so silly pants, The Federal Reserve can buy ALL of our debt.
WE HAVE A RERMANENT BUYER, get it!
Remember as long as someone will lend us money we will not be broke, see the D's talking points of 3 weeks ago.
Reply to this commentLinkReport Abuse"WE HAVE A [P]RERMANENT BUYER, get it!"
Wow, well in that case I'll write some debt, sell it to myself to generate cash, and then if there is a problem buy it back.
I see it's all so very simple.
Oh, you say, I don't have the power to print up the cash. No problem, I'll invent the Mollar, and print those up to pay myself.
Oh, then the problem is that people might decide that the Mollar doesn't have the value I place on it, in terms of other currencies.
Well guess what, that's our point. The value is determined by others.
They have their own currencies, get it!
Reply to this commentLinkReport AbuseOnly if by then we're in the period of hyper-inflation that is unavoidable by now. Maybe 30-40%? And I'm not seeing nearly enough people- in office or in the electorate- with the political courage to make the draconian cuts necessary to save this country from essential bankruptcy.
Reply to this commentLinkReport AbuseI'm afraid we are already in the beginnings of a downward spiral. I hate to be this pessimistic, but if the Fed stops buying US debt this summer then interest rates are going to go up. If they continue to buy US debt, then inflation is going to go up. I'm not an economist (I'm just certified to teach it to high school kids) so I can't predict how big the move is going to be, but rates of only 3% on our debt would increase our debt payments to $500 billion dollars=25% of our tax revenue.
Reply to this commentLinkReport AbuseThe only reason it will retain the AAA in the near term is that the domestic and Euro rating agencies are afraid to make the call. Obviously, the US is no longer a viable debtor by any rational standard. Ultimately, they will have to lower it regardless of the backlash from the US Government, and will certainly do so when the dollar ceases to be the world reserve currency. A Chinese agency cut the rating last year.
Reply to this commentLinkReport AbuseLet's say we do get back to Carter era interest rates of 11-14%. It would take a while for outstanding debt to roll over, but think of 12% interest on $15-20 trillion of debt. $2 trillion a year in debt service easy. Makes Social Security seem like a trivial problem.
Reply to this commentLinkReport AbuseWell if you want the 5-year answer it will be determined by the 2012 election. If you want the real answer, I don't think ratings matter with all the detailed info available independently and with the stellar record of the agencies in the past years.
I believe it will be addressed within a year (as in decreased), perhaps when the next-FY budget comes up. They can't even do a half-year budget, it's embarrassing. With the Federal Reserve apparently a seperate entity to the country, I'm sure the Dollar will drop another 10% this year. The Tea Party movement needs to increase fifty-fold.
PS - new Captcha is horrible.
Reply to this commentLinkReport AbuseSorry to be a bit clueless, but what does it all mean if I own treasury bills that are already mature or near maturity? Is it good that the interest rates will be rising and I can benefit from a higher return? Or is there a risk that, on down the road, I may not be able to sell them at full value because nobody will buy them from me when I am ready to sell?
Reply to this commentLinkReport AbuseBecky,
Or is there a risk that, on down the road, I may not be able to sell them at full value because nobody will buy them from me when I am ready to sell?
That is the risk. You will be able to sell them, but at a steep discount which means you will have a loss of real principal. Besides the interest rate risk there is also the inflation risk that would further erode their value. It could get very ugly.
Reply to this commentLinkReport AbuseDerb has it right: We are doomed, doomed.
Reply to this commentLinkReport AbuseI think chances are better than not that our credit rating will erode. Our fiscal future has been put into autopilot self-destruct mode by our political ruling class over many years. It is like a huge aircraft that is at a certain altitude and is falling at a known rate of speed. There may be a few updrafts and other variables, but the aircraft is so ridiculously overloaded it is a certainty that it will crash within a certain period of time. This scenario has been laid out in a rather stark but simple manner in recent days by Paul Ryan and others. Hallelujah! We see a way out. The load can be lightened and we can very likely avoid the crash! So let's start grabbing all the abundance of worthless, stupid cargo and chunking it overboard. Suddenly, astride the cargo bay door, arms folded, stands the menacing figure of Harry Reid who growls, "I have final say on what goes and what stays on this airplane and I can tell you one thing, there's no way we are getting rid of the Cowboy Poet Society!" . . . . . . . . KABLOOEY!!!
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