Fort Myers Florida Weekly

As debt rises at alarming rate, ditch those government bonds

MONEY & INVESTING



 

 

While it is hard to anticipate devastating “black swan” events like the coronavirus spreading throughout China and the rest of the world, other pending disasters are easier to predict. Last week the U.S. Treasury Department announced the federal government’s budget deficits from October through January and the report was nothing short of breathtaking. Yet, interest rates remain at close to all- time lows and demand for Treasury Bonds is robust. Many analysts believe, however, that at present we are in the calm before storm in the bond market and the future will be devastating for those holding government bonds.

The Treasury Department stated that in the last four months, the government’s expenses were higher than revenues collected by a staggering $389.2 billion. This compared to $310.3 billion in the same period last year, an increase of 25%. For the past 12 months, the government deficit was $1.1 trillion. This was the first time this figure breached the $1 trillion mark since the U.S. was in the middle of the Great Recession in 2012.

— Eric Bretan, the co- owner of Rick’s Estate & Jewelry Buyers in Punta Gorda, was a seni or d erivatives marketer and investment banker for more than 15 years.

— Eric Bretan, the co- owner of Rick’s Estate & Jewelry Buyers in Punta Gorda, was a seni or d erivatives marketer and investment banker for more than 15 years.

From a tree top perspective, the reason for this sizeable deficit is that government expenses are growing much more quickly than revenues. The good news is that taxes paid to the government are actually rising as the economy continues to grow. Receipts came in at $1.18 trillion compared to $1.1 trillion last year, an increase of around 7%. However, government expenses ballooned from $1.42 trillion last year to $1.57 trillion this year, an increase of about 10%.

Of course, budget deficits are nothing new to this country. Since 2001, the U.S. has run continuous red ink. And other than during a few years in the 1950s and the turn of the century, expenses have outpaced revenues over the last hundred years.

But the deficits now are different for a few reasons. First, the magnitude of the revenue deficiencies are much more massive today. With deficits above $1 trillion, the size of the debt is expanding rapidly. Today the government’s debt is $23.3 trillion. That is over $70,000 for every man, woman and child currently living in the United States.

Second, deficits today are occurring regardless of economic conditions. Historically, the U.S. would run large budget shortfalls in time of war, when military expenses would rise, or in recessions when revenues would fall. But then when the military conflict ended or the economy expanded, deficits would fall. Today, red ink is growing even though the economy by many measures is the strongest it has been in years. And finally, there is a seemingly lack of concern about the U.S. debt and deficit, even though both are at or close to record highs.

Many analysts question just why there is so much investor apathy when it comes to large deficits and why investors continue to buy government bonds when it is clear that there is major problem in the bond market. The answer most experts give to this query is that the U.S. bond market is the largest and most liquid in the world, so governments and large portfolio managers have no choice but to buy treasuries. The other answer is that while U.S. deficits are scary, the strength of the U.S. economy still makes buying U.S. government bonds much safer than buying bonds from other governments.

While some investors may take comfort in these arguments, I do not. I can remember the same arguments being used to justify the housing market bubble several years ago, when analysts said that investors should just stay away from low income housing and that high-value real estate and jumbo loans were safe investments. But when the housing market crashed, all real-estate related investments fell in value.

I believe the same thing will happen with the government bond market. The first domino to fall will not be in the U.S., but it will be some second- or third-world country debt not being paid. Investors will panic and all bond holders will feel the pain.

This will obviously not happen overnight and it may not happen for years to come. But I think it is a good time to examine your portfolio to see if you do own government bonds and whether that is something you want to hold for years to come. ¦

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