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Posts Tagged ‘U.S Treasury Bond’

How Stock/Bond Investments Make Money

October 28th, 2011 No comments

In a previous post, I discussed why cash is not a good investment (due to inflation and and its inconsistency in its ability to generate reliable income). If you use your cash instead to invest in stocks or bonds what is it that you are getting and how does it make money?

First, Your Principal is at Risk

Holding cash in insured savings, checking accounts or in money market funds will give you virtual certainty of keeping your principal safe. So, even if interest rates go up or down at the very least you will still have your principal. When you make the transition to other investments, your principal is no longer safe. You can lose money or make money due to the change in value of the asset.

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Will The U.S. Default On Its Debt? Don’t Bet On It

August 25th, 2010 No comments

A Morgan Stanley executive director was quoted in this article saying that it is inevitable that the U.S will default on its debts. No doubt the debt is big, has exploded recently, and at least in the short term going forward will only get bigger. Notes this Congressman from Colorado:

Regarding spending during his time in office he said, “We have managed to acquire $13 trillion of debt on our balance sheet” and, “in my view we have nothing to show for it.” Speaking of the debt, he said our debt almost equals the economy.

At least now we have the unlikely combination of exploding debt but very low interest rates. If markets really thought that the debt was a problem, they would demand higher interest rates to match their concern. If anything, investors can’t get enough of U.S government debt. So from this point of view, the debt may not be a problem.

Another point that the author offers is that we may end up as ‘another Greece’ or name your favorite European country here, given their current debt problems. However, we have an advantage that Greece doesn’t: we issue debt in our own currency. Greece can’t get out from under its debts because they unfortunately were issued in Euros, not a local currency. So they can’t inflate their way out of debt the way the U.S Government can, they have to face up to their debts (or seek relieve from the European Union central bank).

So, the U.S can simply roll the printing presses to pay off its debt. We’ve done it before (1970s against Japanese bond holders), and we can certainly do it again. As long as we can print money, we never have to default.

Categories: Economy Tags: , , ,