From the Congressional Budget Office


Director’s blog:

“In fiscal crises in a number of countries around the world, investors have lost confidence in governments’ abilities to manage their budgets, and those governments have lost their ability to borrow at affordable rates. With U.S. government debt already at a level that is high by historical standards, and the prospect that, under current policies, federal debt would continue to grow, it is possible that interest rates might rise gradually as investors’ confidence in the U.S. government’s finances declined, giving legislators sufficient time to make policy choices that could avert a crisis.

It is also possible, however, that investors would lose confidence abruptly and interest rates on government debt would rise sharply, as evidenced by the experiences of other countries.”

When interest rates rise, bond prices fall (inverse relationship). Given the financial turmoil over the last few years and given that people are looking for ‘safe havens’, many people, especially those who are retired, have purchased bonds (a large portion being government bonds) thinking that they are protected.  They aren’t.  The biggest bubble to have ever existed is the US government bond market bubble.  However, investors rushing to buy at the peak should come as no surprise… they usually do the wrong thing at the peaks (and valleys) of market moves… this time appears to be no different.  Gold and silver are the only ‘safe havens’ now.  Each day this is becoming more evident, but there will come a day when a massive divergence will take place between bond prices and precious metal prices.  Only then will people understand that promises to pay future promises of purchasing power (bonds pay out paper currency over time) are anything but ‘safe havens’.  The final mega spike in gold/silver will occur upon the realization of this.  The trade, once this occurs, will be to exchange your physical metal for real estate and some massively under-valued equities and NOT to sell your metal for paper currency… that would be like jumping from the frying pan into the fire.

… on options to deal with the debt…

“A second action could be adopting an inflationary monetary policy by increasing the supply of money. However, this approach would have negative consequences for both the economy and future budget deficits.”

http://cboblog.cbo.gov/?p=1249


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