July 7, 2011

In my last post I speculated on the possibility that the Federal Government might default on its obligations. The media drumbeat about possible dire consequences has been getting louder by day. Here are two predictions:

  1. There will not be a default.
  2. If there is a default, the consequences will be far more mild than the media consensus is suggesting.

Here's why. Let's assume you sold your house to a couple and you are holding the mortgage. They have always paid you on time, and they have good jobs, but it has become obvious that they live beyond their means. In addition to the mortgage, they have car payments and are relying on credit cards to fund some of their spending. Recently they have been squabbling about whether they should try to get more income or try to cut their spending. As a consequence, there is a risk that they might delay or miss a mortgage payment. As a lender, could you live with a late payment if it meant your borrowers cut back their borrowing and spending? Or would you feel safer with the status quo?

There are other factors to consider. The US doesn't borrow in a vacuum. We compete for investor dollars in an open marketplace. After all, investors don't have to buy US Treasury securities - why not consider China, or Kazakhstan? The answer is obvious. To paraphrase Winston Churchill, US Treasury bonds may be the worst investment, except for all of the others.

In sum, the current default debate is a tempest in a teapot.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).