Friday, December 26, 2008

U.S. Debt - The Biggest Bubble of All

As the federal interest rate approaches a flat zero economists are questioning the future of American Treasury bills. Tim Iacono from The Mess That Greenspan Made provides a key excerpt from recent press which highlights the possible—perhaps inevitable—bursting of the U.S. debt bubble.

In today's commentary at Bloomberg, Michael Sesit consults with the "Bond King" on what many call the biggest and baddest bubble of them all - U.S. debt.

To Bill Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., the answer is yes. “Treasuries have some bubble characteristics, certainly the Treasury bill does,” Gross said earlier this month. “A Treasury bill at zero percent is overvalued. Who could argue with that in terms of the return relative to the risk? There is no return.”

...

The bursting of a bubble in the U.S. government bond market would be a perilous event.

First, it would cause large losses for millions of investors, especially U.S. retirees who regard Treasury securities as the ultimate safe investment.

Second, it might threaten Treasuries’ status as the global “risk-free asset” and would damage the international stature of the U.S. Foreigners, who own about half of all Treasuries, might stop funding the country’s growing trade and budget deficits without an increase in U.S. interest rates.

Finally, a busted Treasury-market bubble could undermine the dollar’s global reserve-currency status, which in turn would spell higher U.S. interest rates, undercutting economic growth.


Big and bad and likely to burst someday...

This post can also be viewed on themessthatgreenspanmade.blogspot.com.
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1 comments:

December 29, 2008 at 3:20 AM Sharon Hollas said...

Pretty mindboggling that debt level.

Sharon Hollas - Langley Real Estate

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