This post is in response to all of the fear mongering that I see from both politicians and the media regarding the debt ceiling. While the debt ceiling is certainly important and has implications if left alone, I would not at all be surprised if the hype has once again surpassed the reality of the situation. Again and again I hear on the media that this would be "the first time in history" that the U.S. would default on it's debt. This is simply not true, in the past 120 years this country has defaulted in one form or another approximately 4 times. In each of these instances the world continued to turn, and the country continued to function. Financially each time the value of the currency was devalued. This puts cash at risk, however assets such as commodities, stocks, real estate, all ultimately benefit from a devaluation. In addition any outstanding debts become artificially less significant. Ultimately I believe this is what this country is trying to do, devalue the currency with out the public knowing it's plan, this would enrage retiree's and those with large amounts of cash. For the lower class in this country the defaulting of the debt could prove to be a great thing, and ultimately will accomplish yet another transfer of wealth in this country (think real estate bust). The ones hurt the most are those with the most cash. Those with large amounts of unsustainable debt ultimately will be "bailed out" by this deliberate devaluation.
Ok, so that being said what should YOU do? Well, I wouldn't hold US treasury bonds, In addition I would trim my cash positions. Ultimately real estate is the ideal investment during this time period as it has already been pummeled and provides an excellent hedge against inflation. If you can purchase real estate with cash at this time, I say DO IT. Ten years out this could prove to be one of the finest financial moves you have ever made. If you are unable to purchase real estate with cash, the next best option is a well diversified stock portfolio which in the past have shown good performance during periods of inflation. Lastly I would look to commodities, however a word of CAUTION , you are jumping on the most popular band wagon and most commodities are very expensive. You could be buying into a bubble if the economy doesn't react as violently as the world is preparing for.
Hold on it's going to be a bumpy ride, but just remember just because the ride is bumpy doesn't mean that it can't be prosperous.
Discussion Question : What are you doing to prepare for a potential US default on it's debt?
A default on U.S. debt could actually weigh on people's financial lives in a myriad of ways, such as really boosting interest rates on mortgage loans and denting already fragile retirement accounts if the stock market continues to tumble.
ReplyDeleteInteresting as the US debt was downgraded , interest rates actually fell.
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