In recent essays in Roll Call and the Wall Street Journal, Cong. Jim Cooper of Tennessee is pointing out that Standard & Poor’s is projecting that by 2012, the U.S. Treasury bond will lose its AAA rating, and that by 2025, it will fall to junk status.
Source link: http://archive.mises.org/6515/whither-the-risk-free-rate/
Whither the Risk Free Rate?
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Two Things:
1. Woe is Jim Cooper and the poor members of Congress. Bush hoodwinked, flim flammed, conned and heisted them. Not a single multi-billion dollar spending bill was their fault. They could not help themselves against the power of the Bush.
I thought there was a thing called the Congressional Budget Office but that is obviously controlled by the Bush as well.
2. I am somewhat suprised that it is taking that long to get the junk rating. The Federal Government has a liability of about 65 trillion and that does not include the new prescription drug program.
Bill,
The government also has the legal right to steal every asset from every person in the country — not to mention all of its previously stolen assets and its ability to print legal tender.
I don’t know how the bonds can get a meaningful rating anyway – I guess at least one somebody at S&P doesn’t understand the nature of government. There is no way to imagine the government defaulting on bonds… they can just print the money to payoff the bonds and then tax the money right back anyway. Again, how can this anti-market institution be given a market rating?
When have you known a congressman to be right about anything, let alone economics and finance?
I’m predicting the same thing as Cooper and S & P. That is why I’m short the long bond. Even if they do continue to pay interest and premium, the purchasing power of the dollar can fall–theoretically to zero. Isn’t that default or partial default. Currently the long bond is figured to have less than 2% inflation over the next 30 years. I’m willing to bet against that!
Junk is junk, actually it can be a lot less valuable than junk. The rating agency is absolutely correct. Just because the Federal Government can nominally pay back the money it owes means nothing to the holders of the bonds who will get worthless or near worthless currency for their investments, if you call it that.
A Federal Bond is NOT a risk free asset. It has less risk because the Federal Government can use its twin hammers of extracting taxes using violence or watering down the currency to pay the bonds back nominally. But, nominal value is not real value.
Of course the bonds aren’t worth buying, but that is different from defaulting. They are junk if you believe the government is going to either destroy the value of the dollar and/or not pay default on its nominal obligations. I believe the former is more likely and this is clearly not a market-based reason for assessing a bond to be good or bad. Also, if the government does inflate to such a high degree, there are other bonds that are likely to go down the tank, too (i.e., not worth buying).
If the Federal government does drastically increase the rate of monetary inflation to honor its debt obligations, virtually all financial obligations denominated in nominal U.S. dollars, not just Treasury bonds, would be negatively impacted. To possibly avoid this, the financial obligation would have to contain explicit protection against inflation.
Also, I never considered Treasury bonds to be risk free, as they are subject to the risk of price decline due to increasing interest rates. If any U.S. credit instrument can be considered risk free, it would have to be the Treasury bill. As a result of the Treasury bill’s extremely short duration, principal fluctuations caused by interest rate changes are virtually eliminated.
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