The word “default” can send a little shiver of fear down the spine of even the most fearless citizen, and it’s hard not to heave a little sigh of relief when you discover it’s someone else and not you. But you could do absolutely everything correct in your financial dealings and still end up feeling the bite of a default, thanks to your favorite Uncle Sam. We hear the fearmongers in the media every day talking about how only a thin sliver of solvency separates the United States from bankruptcy.
Which begs the question, what will it look like when the sliver disappears? How exactly does a country defaulting on its debt affect the man in the street? Unfortunately, there’s a good chance we’re about to find out. First we should point out there there is one teensy tiny factor in our favor which might prevent a Weimar-esque sprint into hyperinflation, and that’s that we still hold the world’s reserve currency, though it’s anyone’s bet how long that will be the case.
Let’s check on a recent quote by Bill Gross, Chief Investment Officer of PIMCO, the world’s largest bond fund. Gross is personally responsible for $1.2 trillion worth of assets and had this to say: “I am confident that this country will default on it’s debt.”
Not much wiggle room there. He IS confident we WILL default. Gross has been busy getting PIMCO out of treasury bonds and thinks that unless Social Security and Medicare aren’t reformed substantially, and quickly, the default is a done deal. Gross went on to say the default was already underway to some extent. Here’s how he explained it. “Not in conventional ways,” he said, “but by picking the pockets of savers.” He says the government will pick your pocket through “inflation, currency devaluation, and low to negative real interest rates.”
That’s is why it’s dangerous to be a saver right now. Low interest interest rates paid on treasury bonds and bank certificates of deposit end up actually costing you money by the time inflation is figured in. If Gross is taking his money out of assets backed by the “faith and credit” of
the United States government, where is he putting it?
Mortgage-backed bonds! At least there’s a real asset somewhere on the other side of all that paper.
The Young Wealth Team
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