Friday, July 29, 2011

Markets display wild reaction to debt refinance bill

New York – Interest on 10-year t-bonds plummeted, stocks fell and mortgage derivatives opened 15% off the pace.

Traditional fixed income investments are in the crosshairs as Congress negotiates a new financial posture in the world of money.

The truth: the collapse of 2008, which government figures released yesterday show was much worse than ever before understood, set off a cascade of financial disaster from which the nation, and the world, is yet to recover. It's a truth politicians just can't seem to face.

Those who make their money off the worth of securities are having no problem with that.

Standard & Poor announced there is a 50-50 chance it will downgrade the nation's Triple-A bond rating to Double-A, which means much, much higher interest rates across the board.

The numbers are stark – and scary.

Within four years, 61% of all the marketable Treasury debt held by the public will mature. Thus, over the next four years, the U.S. Treasury must either repay or refinance more than $1 trillion in existing debt each year – not to mention additional deficit spending of at least $1.5 trillion. For us to avoid a default, the U.S. Treasury may have to borrow or refinance as much as $10 trillion in the next four years. That would double the amount of U.S. Treasury bonds currently trading in the world's markets.

This week's inept political actions in the U.S. Congress only exacerbate the problem.

There is little doubt that the government's strategy will involve monetizing personal wealth and the means of its acquisition. Fixed income investors have no choice but to put their savings in more stable currencies such as Swiss Francs – or the like.

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