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How to Protect Your Portfolio as Government Debt Cripples America

Stock-Markets / Stock Markets 2013 Oct 30, 2013 - 10:51 AM GMT

By: InvestmentContrarian

Stock-Markets

Sasha Cekerevac writes: Whenever I’m asked what I think has the biggest potential impact not only on the stock market, but also on our way of life, I always point to the continued increase in government debt.

Over the short term, the Federal Reserve has attempted to stimulate the economy partially by buying U.S. Treasuries. Under normal monetary policy, the Federal Reserve only directly impacts short-term interest rates. To reduce long-term interest rates, the Fed began buying U.S. Treasuries, pushing up the price and lowering the yield.


Over the short term, we can look around today and notice that the sky is not falling. However, as government debt continues to pile on, approaching $17.0 trillion (which doesn’t include unfunded liabilities), at some point, this will impact not only U.S. Treasuries, but also our entire economy.

Part of the reason that U.S. Treasuries are still in demand worldwide is that the U.S. dollar remains a reserve currency. There are benefits from a logistical standpoint in conducting business using the reserve currency to also use U.S. Treasuries for investment purposes.

However, as I’ve mentioned in other articles, large investors in U.S. Treasuries, such as China, are increasingly calling for a new global financial system that relies less on the U.S. dollar.

That sentiment alone should shock the politicians into action and make them realize that our biggest lenders, the ones buying our U.S. Treasuries, are questioning our ability to manage the rising pile of government debt.

The most recent data from August was that China actually reduced its holdings in U.S. Treasuries to a six-month low, according to the U.S. Department of the Treasury. (Source: “Major Foreign Holders of Treasury Securities,” U.S. Department of the Treasury, October 22, 2013.)

China still remains the biggest holder of U.S. Treasuries, and our continued accumulation of government debt certainly must be a worry to not only China, but the rest of the world, as well. After all, as the reserve currency and leading economic power, how we run our economy will make an impression on the rest of the world. The way we’re going now, it appears we’re running our economy into the ground.

Is this reduction in U.S. Treasuries by China just a temporary blip or will foreign investors once again begin buying up our government debt going forward?

Over the short term, these types of variables are difficult to predict. As I said before, we are lucky that the rest of the world is in such a mess. However, that is no excuse for continuing to add on ever-increasing levels of government debt.

Look, we can’t be hypocritical and look down our noses at nations like Greece, which also ran up its level of government debt until it was unsustainable. While we are obviously much stronger as a nation, we are nevertheless on the same path.

It is true; the budget deficit has been cut significantly. But when was the last time any politician talked about generating significant budget surpluses to actually begin paying down our government debt? It’s almost as if politicians don’t even know the word “surplus” exists.

One way for government debt to be reduced, other than actually paying it back, is through inflation. By creating inflation, the government debt is paid off with tomorrow’s dollars, which have less buying power.

What’s an investor to do?

While diversifying into other currencies would be one way to hedge, there aren’t any strong alternatives at this point. I might consider the euro if the weaker nations were to leave and only strong nations like Germany remained; however, I don’t see this occurring anytime soon.

The other option would be to buy assets that move up with inflation, and this certainly includes precious metals, such as gold and silver. From what I see, diversifying your portfolio into a variety of assets that include some hedge protection against inflation is a prudent course of action at this point.

This article How to Protect Your Portfolio as Government Debt Cripples America was originally published at Investment Contrarians

By Sasha Cekerevac, BA
www.investmentcontrarians.com

Investment Contrarians is our daily financial e-letter dedicated to helping investors make money by going against the “herd mentality.”

About Author: Sasha Cekerevac, BA Economics with Finance specialization, is a Senior Editor at Lombardi Financial. He worked for CIBC World Markets for several years before moving to a top hedge fund, with assets under management of over $1.0 billion. He has comprehensive knowledge of institutional money flow; how the big funds analyze and execute their trades in the market. With a thorough understanding of both fundamental and technical subjects, Sasha offers a roadmap into how the markets really function and what to look for as an investor. His newsletters provide an experienced perspective on what the big funds are planning and how you can profit from it. He is the editor of several of Lombardi’s popular financial newsletters, including Payload Stocks and Pump & Dump Alert. See Sasha Cekerevac Article Archives

Copyright © 2013 Investment Contrarians - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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