Since the government shutdown began last week, Republicans and Democrats have been trading the blame over the political impasse that now threatens to plunge the nation into default. Barring a resolution before October 17, the United States is facing the real risk of defaulting on its financial liabilities for the first time in its history.
Some say that the consequences of doing so simply can't be that severe – right? In order to understand why this would be bad, you have to consider the role that U.S. Treasury bonds play in the global financial system. They are considered the "benchmark," a "safety security" which has a risk profile based purely on the fact that the U.S. has always paid its bills. Undoing this integrity – or even the perception that such an event could take place – may cause some investors, both sovereign and institutional, to back off on their debt purchases. Indeed, they may even decide to dump their holdings in search of a safer asset.
Here's where things get tricky. Suppose that a body of investors composed of several big institutional groups and a powerful sovereign creditor, like Russia, decides to sell. This could create a cascade effect by which other investors – not wanting to get sucked into the mounting losses – decide to jump ship as well. This will cause a huge spike in interest costs that the federal government simply can't afford. The only recourse would be for the Federal Reserve to print more money to meet these obligations, but doing so could cause the risk of not just hyperinflation but of severe dollar devaluation caused by a loss of influence in global exchange. The dollar's status as the global reserve currency could be questioned, imperiling the ongoing economic recover here in the United States.
Scary stuff, right? Investors need to prepare for the worst, which means investing in alternative assets like cash flow real estate to provide a buffer against any market turbulence caused by a U.S. debt default or market correction. Contact Great Wealth Strategies to learn more!