I see a lot of people here saying that they have most if not all of their investments in TIPS. Those of you that have, have you ever considered the possibility the the US government could go broke in the future? If so, what do you expect would happen to your TIPS investment? Wouldn't corporate bonds, commodities and equity be a better investment in such a scenario?
I completely agree with your points.
My standard joke is that I'm neither a Democrat nor a Republican.
I'm a Banana Republican. Sigh.
I may not be fully prepared for what's coming, but I'm better prepared than most. Heck, I've hoarded nearly 1000 rolls of toilet paper and many other items that store well long-term. Seriosly.
I did some research on this topic. There is usually a settlement on defaulted sovereign debt. Range is anywhere from 20 cents to 70 cents on the "dollar".
Doesn't matter if it's t-bills, notes, bonds, TIPS or savings bonds. All sovereign debt goes bust at once as I understand it.
When interest on the debt exceeds the ability to pay, then default happens. Russia defaulted in 1998. Argentina has defaulted may times. Last year, Iceland defaulted. This is more a common occurrence than many Americans understand.
The other possible outcome is too much money printing to monetize the debt and that leads to currency collapse. Germany has been through many currency collapses from printing too much money, like Ben Bernanke is doing.
*** AVOID *** 100% ALLOCATION IN USA GOVERNMENT DEBT AT THIS TIME OUR CENTRAL BANK IS BEHAVING RECKLESSLY WITH OUR MONEY AS IS OUR PRESIDENT, CONGRESS, TREASURY, FDIC, etc.
"Regardless of its fiscal situation, a country that borrows in its own currency never has to default because it can always create its own money to cover the bond payments. Issuing new money to retire debt—while still very unlikely for the United States—normally creates inflation that devalues existing debt. Inflating away debt is much more likely than a formal sovereign default in which a country simply refuses to make payments."
That's a quote from our very own St. Louis Fed. Never has to default. Inflating away debt is much more likely.
We borrow in our own currency, so our default should be in the form of inflation.
The reason this matters can be shown as follows.
If we borrowed Euros and then our dollar collapsed, then it would be VERY difficult to pay those Euros back. They'd be way too expensive. Although our government has a monetary printing press, it cannot print Euros.
If we borrow US Dollars and then our dollar collapsed, then it would be VERY easy to pay those dollars back. As Bernanke said in 2002, we can print them "at essentially no cost".
Put another way, all we owe are our pieces of paper (dollars). We don't owe gold. We don't owe oil. We don't owe stable foreign currencies. I'm fairly sure we can pay our debts. Unfortunately, I cannot promise that our dollars will buy much in the distant future.
The government will PRINT money for itself before it goes broke.
The government will NEVER go broke.
A more likely senario is that the government prints so much money that inflation goes wild as it did in Germany in the 1920's.
In my opinion, the government is broke. We fell off the gold standard in the 1970s. I therefore just expect more of the same. Sigh.
1. It is the government that is currently propping up our economy. Without that support, I doubt very much that equities and corporate bonds would be much of a safe haven. Heck, for the last 10 years they haven't been much of a safe haven even with that support.
2. The US Government has a monetary printing press. If it owes us a dollar, Ben Bernanke assured us in 2002 (his famous deflation speech) that he can print them for us at essentially no cost. (There is no promise what they will be worth though.)
3. As for commodities, I am bullish on toilet paper. Seriously. It is amazingly cheap compared to the current price of gold. I've got nearly a thousand rolls. No joke. I have a lot of other similar items that store well and are things I know I will someday need. The best part is that I won't have to pay capital gains on the inflationary profits as I won't be reselling it. I'll be consuming it instead. As another example, I also have a LOT of socks. I could be wrong, but I doubt they get much cheaper (or higher quality).
4. I do think we will be more broke in the future. That does seem to be the trend. It is my hope that I die of old age before it affects TIPS too much though. The fall of the Roman Empire was measured in centuries. I've been bearish for 5 years so far. I think we can drag this thing out at least another 30 years. Just look at Japan. Their decline started about 20 years ago.
5. I'm not really trying to insure against a total financial apocalypse. With the hundreds of trillions of dollars in the derivatives markets, I'm not even convinced there is a defense. Buffett calls them financial weapons of mass destruction. One can only imagine the carnage a US default on its debt would create in THOSE markets. It would take a VERY brave politician to trigger that. Know any VERY brave politicians? I don't.
6. If I end up being financially ruined by having the bulk of my nest egg in inflation protected US Government debt (which very well may happen someday), then I can say quite confidently that I probably won't be the first to be ruined. They say the goal in a bear market is to lose less. Perhaps losing last isn't so bad either, especially since I plan on dying broke anyway. It's not like I can take it with me.
7. And lastly, maybe I am wrong to be bearish. Perhaps Mr. Fusion is invented tomorrow. Perhaps it ushers in a new wave of untold prosperity. In that world, I'd be doing even better long-term though. It's not the kind of environment likely to financially ruin me. I therefore can actually hope I'm wrong.