Government Bond Yields to Skyrocket
- Cut Taxes AND Spending
- What Happens When a Government’s Credit Rating Gets Cut
- Our Debt is Unsustainable
As a result of our Federal Government’s inability to cut spending while at the same time extending Bush era tax cuts, our country’s debt is in danger of being downgraded from its triple-A rating.
What it means: future bond rates will necessarily have to go higher. You don’t get to keep selling low-yield debt when your ability to pay it back is universally recognized as not-quite-prime.
Don’t get me wrong: I’m not saying that we should raise taxes. But I am saying that you can’t cut taxes unless you’re prepared to cut expenses. If that seems like an extreme position, then I take that as good news for my gold and silver holdings.
If our elected leaders didn’t see this potential downgrade coming, they should resign in disgrace. They’re simply not fit to govern if they don’t understand that planned-deficit spending has real world consequences.
The surprising thing is that no one is really paying these types of warnings much heed. According to Money News, “The cost of insuring U.S. government debt in the credit default swap market was little changed on Monday at around 41 basis points, or $41,000 per year to insure $10 million in debt for five years, according to Markit Intraday.”
The problem of course is that even a marginal rating decrease from Moody’s or any other agency could have huge implications for debt-service costs in the future.
As a fresh example: On July 19, 2010, Moody’s cut Ireland’s credit rating one notch, from triple-A to Aa2.
That was only five months ago. Back then Irish 10 Year Bonds yielded 5.5%.
Since then, yields have only risen. Today, Irish 10 Year Bonds yield more than 8%.
I’ve talked before about how Euro-zone debt woes are a crystal ball for what will happen in the United States.
For instance, any first year finance student can look at Ireland’s books and see that without cutting government spending to the bone, and raising taxes to unreasonable 50%+ levels, that Ireland is going to have a hard time paying interest on its debt, let alone servicing the principle.
Likewise, with United States’ current debt levels of $13 trillion - and annual tax receipts of around $2 trillion, coupled with yearly expenditures that regularly add to the deficit, it’s tough to see how we’ll be able to pay the interest on our debt, let alone the principle.
Bond-buyers (whether they’re individuals, institutions or governments) will demand higher rates if (when) the US loses its triple-A status. When that time comes, the Treasury will get pinched as rates on even the shortest term bonds begin to rise.
I fully expect 10 year US Treasury debt to climb above 8% in the coming years.
Rates will be so high for so long that the only choices left for the US Government will be default or massive inflation.
This trend becomes increasingly inevitable as the Federal Government continues to pursue deficit spending - and it will rapidly accelerate as mainstream credit-rating agencies like Moody’s start to take notice.
Invest accordingly. Protect your wealth today, before it becomes a liability in your portfolio tomorrow.
Good investing,
Kevin McElroy
Editor
Resource Prospector
