| Click for the Finfacts Ireland Portal Homepage |

Finfacts Business News Centre

 Irish Economy
 EU Economy
 US Economy
 UK Economy
 Global Economy
 Asia Economy


How to use our RSS feed

Follow Finfacts on Twitter

Web Finfacts

See Search Box lower down this column for searches of Finfacts news pages. Where there may be the odd special character missing from an older page, it's a problem that developed when Interactive Tools upgraded to a new content management system.


Finfacts is Ireland's leading business information site and you are in its business news section.


Finfacts Homepage

Irish Share Prices

Euribor Daily Rates

Irish Economy

Global Income Per Capita

Global Cost of Living

Irish Tax - Income/Corporate

Global News

Bloomberg News

CNN Money

Cnet Tech News


Irish Independent

Irish Times

Irish Examiner

New York Times

Financial Times

Technology News




Content Management by interactivetools.com.

Analysis/Comment Last Updated: Nov 28, 2011 - 4:08 AM

Dr Peter Morici: Investors should be wary of buying US Treasuries
By Professor Peter Morici
Nov 28, 2011 - 3:55 AM

Email this article
 Printer friendly page
President Barack Obama and daughters Sasha and Malia shop at Kramerbook & Afterwords Cafe in Washington, DC, Saturday, Nov 26, 2011.

Dr Peter Morici: The Super Committee’s failure to compromise on $1.2trn in budget savings won’t much affect the deficit and US credit ratings—or the interest rates and prices of US Treasuries.  Still investors should limit holdings of those securities—the long term outlook is not good.

Although the Super Committee did not reach consensus on a combination of spending cuts and tax hikes, the Budget Control Act automatically triggers $1.2trn reductions in defense outlays, nonentitlement domestic spending and some payments to hospitals and health care providers.

Savings from winding down wars in Afghanistan and Iraq were already scored into budget projections; hence, new defense cuts will be from the “base” military budget that maintains readiness and defends US security interests around the globe.

The Budget Control Act, passed in August, already cut defense spending by $450bn over ten years, and another $500bn is simply unacceptable. US hardware is aging—sons fly the same fighters as did their fathers; cyber warfare requires new capabilities beyond conventional land, air and sea forces; and China is building a navy and will spend on defense 60% as much as the United States within a decade—with lower personnel costs and without America’s global responsibilities. More, not fewer, naval resources are needed to meet that challenge in the Pacific—on a recent trip to Asia, President Obama committed to a beefed up US presence.

Republicans in Congress will propose repealing the $500bn cut but liberal Democrats will demand that spending be refinanced with other cuts or new taxes. Grover Norquist won’t be able to stop such a deal—hard realities, especially national security concerns, have a way of neutralizing the clout of mono-line political activists.

A deal on defense spending will legitimize similar tradeoffs to reduce other Budget Act mandated cuts and make some tax increases acceptable, even among many conservative Republicans.

Consequently, the impact on the deficit of the Super Committee failure will be marginal. The budget dance that follows should not provide a basis for S&P to lower its AA+ bond rating on US bonds, or for Moody and Fitch to lower their AAA ratings.

Longer term, the cuts the Budget Act required won’t be enough. The United States will continue to borrow too much and grow too slowly until more important structural issues are addressed. Within a few years, US borrowing costs will be much higher than today.

Currently, Washington enjoys low borrowing costs, because foreign central banks, private institutions and ordinary investors are all fleeing European debt. Similarly, China’s shaky banks and dodgy accounting standards, along with Beijing’s exhortations that yuan appreciation has run to course, are causing money to flee China for America. That money is dumping into Treasuries, solid corporate and state debt, and even junk bonds.

Within a few years, that money will leave, after Europe has its ultimate financial crisis and then recovers and investors realize that China’s sovereign debt is no more risky than US paper. Rates on Treasuries will rise, as investors become much more nervous that either Washington won’t be able to continue floating $1trn a year in new debt or the Fed will simply roll the printing presses to buy what Treasuries investors won’t take.

Long bond rates will rise, and Treasuries bought today will lose value. Simply, in 2014, why would someone pay as much for Treasuries maturing 27 years later and yielding 3%, when a new 30 year bond pays 5%. At that point investors who purchased bonds today either must wait for those to mature and endure low interest rates, or take a haircut if they sell.

The message to the ordinary investor is simple, Treasuries are safe up to a point—the US government can always print money if necessary to honor its debt—but those investors should only buy bonds with maturities no longer than their circumstances permit them to have their money tied up. Treasuries won’t long be a liquid investment.

Peter Morici,

Professor, Robert H. Smith School of Business, University of Maryland,

College Park, MD 20742-1815,

703 549 4338 Phone

703 618 4338 Cell Phone




Related Articles
Related Articles

© Copyright 2011 by Finfacts.com

Top of Page

Latest Headlines
Disastrous 44-year War on Drugs and ignoring the evidence
HSBC & Tax Evasion: France/ Belgium issued criminal charges; UK/ Ireland nothing
Analysis: Germany world's top surplus economy; UK tops deficit ranks
Facts do not always change minds - can even entrench misinformed
Finfacts changes from 2015
Facts of 2014: Guinness not Irish; 110 people own 35% of Russia's wealth
In defence of dissent and Ireland's nattering nabobs of negativism
Dreams of European Growth: France and Italy facing pre-euro economic problems
Globalization's new normal needs permanent underclass - Part 1
MH17 and Gaza: who is responsible?
Israel vs Palestine: Colonization set for major expansion
Aviva Ireland's 'fund' runs dry and life cover to die for
We wish Martin Shanahan - new IDA Ireland chief - well but...
Ireland as an Organised Hypocrisy is in lots of company
Dr Peter Morici: Friday’s US jobs report won’t alter Fed plans to raise interest rates
Own Goal: Could FIFA have picked worse World Cup hosts?
Ireland: Spin and spending will not save bewildered Coalition
Irish Government parties set for 2-year vote buying spending spree
European Parliament: Vote No. 1 for Diarmuid O'Flynn in Ireland South
Dr Peter Morici: US April jobs report may show 215,000 added in April
Dr Peter Morici: Hardly time to call Obamacare a success
Celtic Tiger RIP: Change in conservative Ireland six years after crash
Dr Peter Morici: Five things to know about the Fed’s obsession with inflation
In age of acronym/ Google, Trinity to rebrand as 'Trinity College, the University of Dublin’
Hoeness case part of ‘painful’ change for Swiss bankers
Dr Peter Morici: The Cold War was only on vacation
Dr Peter Morici: US economy drags on Obama's approval ratings; Don’t look for changes in Washington
Dr Peter Morici: Bitcoin debacle shatters the myth of virtual money
Dr Peter Morici: US Tax Reform: Eliminate the income tax and IRS altogether
Wealth threatens the simple life in Gstaad, Switzerland
Irish journalists get cash payouts over 'homophobic' defamation claim
Irish academics get lavish pension top-ups as private pensions struggle
Dr Peter Morici: Inequality is President Obama’s highest priority, but solutions are naive
The Finfacts Troika: Better times ahead and a hangover to forget?
Dr Peter Morici: Volcker Rule arrives with the hidden jewel in Dodd-Frank financial reforms
Ireland's toothless fiscal watchdog threatens to bark
Analysis: Germany's current account surplus - - Part 2
The end of western affluence?
Bono's hypocrisy on Africa, corporate tax avoidance in Ireland
France like Ireland is run for the benefit of the old