US Debt and the Future for Interest Rates

Many investment professionals believe interest rates on US Government debt are too low given the current budget deficit and the future fiscal drain of Medicare and Social Security as presently constituted and the risks these problems present relative to our ability to pay our debt obligations.  We are extremely fortunate that the market hasn’t forced us to pay higher interest rates yet, which is probably largely attributable to the reserve currency status of the US dollar and the fact that the world does not want to face the consequence of admitting that the issuer of the world’s reserve currency may itself be a financial house of cards!

Bill Gross manages one of the largest – if not the largest – bond funds in the World.  In his recent “Investment Outlook” – when you get past the first part where he is talking about losing his memory, which is not a terribly compelling read – he offers a very thought-provoking perspective on these issues which is supported by 3 separate, objective and independent studies and findings.  The two most interesting observations to me are:

1.  The financial status of the U.S., if analyzed on the basis of our financial circumstances alone with the reserve currency status of our currency removed, places us in his “Ring of Fire” with other very familiar – and troubling – governmental debt issuers: Greece, France and Spain.

2.  The governments of developing market countries have a much better financial outlook than those of developed market countries, whose budgets have been ravished by decades of out-of-control deficit spending.

It is a worthwhile read:  Damages (PDF)

Just because Bill Gross manages a lot of fixed income doesn’t mean his ideas are necessarily right.  In 2011 he famously pronounced a bubble in US bond prices early in the year and put his money where his mouth was by selling stakes his funds owned in US Government bonds.  When rates instead declined by about 30% over the last half of 2011, he turned out to be galactically wrong (at least for the moment) and his funds had an uncharacteristically awful year relative to their peers.  But the warnings he sounds in this article are ominous.  I think they make a clear case for the urgency of getting the US financial situation under control and the consequences – rising interest rates and loss of bond values, poor stock market, cheapened US dollar (extended lackluster economic recovery?), and rampant inflation – of continued inaction and inability to address the pressing issue of our Country’s financial irresponsibility.

Irrespective of your political point of view, I think the vase majority of us recognize this is a HUGE problem and hope that the upcoming election results in a government that will actually take some action on these critically important matters.

About Objectively Speaking

Tom Batterman, founder of Vigil Trust & Financial Advocacy and Financial Fiduciaries, LLC is in the business of representing the best financial interests of his clients. Having provided objective, fee-only financial management services for over two decades, he specializes in managing the investment and related financial affairs of individuals and mutual insurance companies who do not have the time, interest or expertise to manage such matters on their own. As an objective, unbiased professional who takes on a fiduciary responsibility to his clients, he guides clients to the financial decisions they would make themselves if they had years of training and experience and the time and expertise to fully research and understand all of their options. Founded in 2010 as an outgrowth of Vigil Trust & Financial Advocacy, Financial Fiduciaries, LLC is a financial management solution for individuals and mutual insurance companies who recognize they do not have the time, interest or expertise to properly attend to their financial matters on their own. While there are many financial “advisors”, most of them have investment products to sell and the “advice” they provide is geared toward getting their clients to engage in a purchase. As one of the rare subset of advisors known as “fiduciary advisors”, Financial Fiduciaries does not sell any investment product so its guidance is not compromised by conflicts of interest which plague ordinary advisors. Prior to his employment in the financial industry in financial advocacy and trust positions, he worked at a private law practice in the Wausau area in the areas of estate planning, tax, retirement planning, corporate organizations and real estate. He is a graduate of the University of Wisconsin-Madison and the UW-Madison Law School and has during his career held Series 7, 24 and 65 securities licenses. A longtime resident of the Wausau, Wisconsin Area, Tom is active in the community. He enjoys golf, curling, skiing, fishing, traveling and spending time with his family.
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