When financial experts talk about the U.S. national debt, do your eyes glaze over? You may want to drink some coffee and pay attention, since the consequences of the national debt are unavoidable for investors. (You can ignore politics, but the government’s economic policies won’t ignore you.)
A new “debt solution” is being seriously considered by the government. Before we get to that, let’s wrap our heads around the debt crisis that is prompting this new economic idea that some think could help keep the economy on track.
The national debt is now at $21.5 trillion, which means it is higher than the U.S. GDP. In fact, if you combine the GDP of China, Japan and Germany, you still wouldn’t reach the size of the U.S. national debt.
It gets worse: there are no signs this will stop growing. According to the Congressional Budget Office, the public will hold $54 trillion dollars of the total national debt in the next 30 years.
This mountain of debt ultimately affects your stock market returns in several ways.
That is why some financial experts are proposing a new opportunity for U.S. investors that has had mixed results in 14 other countries.
Treasury Secretary Floats Idea to Help Federal Debt
Recently, Treasury Secretary Steven Mnuchin said the administration is carefully considering offering bonds with maturities of 50 to 100 years. The news media calls this “100-Year Debt” or “Century Bonds”, and the record-low interest rates are a big reason why the Treasury department is now revisiting the idea. They see an opportunity to sell bonds that will stay at roughly 1% for a century.
Long-term debt instruments like century bonds have been talked about by U.S. leaders since 2009, but they’ve been kept on the shelf due to Wall Street’s lack of enthusiasm.
Bloomberg reports the Trump administration is revisiting the 100-Year Debt idea because of the yield curve inverting last month. They also think offering extremely long-term debt would limit taxpayers’ burden of lowering the budget deficit. Pension funds would also enjoy a few extra points of returns amid falling yields.
Keep in mind, other countries are already offering century bonds. Argentina and Austria are two recent examples, with each country experiencing quite different results.
Reactions to the Idea
Since 2009, the U.S. banking community has shown little enthusiasm for offering century bonds or even 50-year bonds, and their tepid response to Mnuchin’s statements show things haven’t changed from their point of view.
“Treasury has studied ultra-issuance numerous times in the past and has always concluded it was not in the best interest of the taxpayer,” said Mark Cabana, CFA, head of U.S. rates strategy at Bank of America Merrill Lynch. “In their 2017 study, they did not see evidence of strong or sustainable demand for maturities beyond 30 years. We doubt Treasury’s conclusions from upcoming outreach will be materially different.”
So far, the Treasury department is doing the most cheerleading on the issue. Along with Mnuchin’s public statements, the President’s former top economic advisor Gary Cohn recalled that during his tenure he saw an enormous amount of demand for ultra-long bonds, and he also thinks century bonds could help finance spending on infrastructure.
Peter Tchir, head of macro strategy at Academy Securities told the Financial Times that the issuance of ultra-long dated bonds could be a “great idea” and “overdue.”
From Congress to the general public, little has been said publicly about the 100-year bonds idea. Gennadiy Goldberg, U.S. rates strategist at TD Securities summed up the sentiment well. “This comes up every now and again. Every time the takeaway is, there simply isn’t enough demand at that tenor, or at least there hasn’t been in the past.”
But what if the U.S. did indeed start offering 100-year bonds? How might this affect your investments?
The Bond Market vs. Gold
Conservative investors have always perceived bonds to be the safe route to investing, and there is data supporting that perception. However, with that conservative approach comes smaller returns, and the prospects for earning positive real returns with fixed income securities does not look promising over the long term. That is not good news for most people, especially those who are near retirement.
Look at Germany: their ten-year yield has descended to -0.3%. (Yes, it is losing money.) The U.S. 10-year yield has descended to 2.0%. According to Bloomberg, approximately 25% of global bonds now trade at negative yields.
The only way for bonds to become more lucrative is for interest rates to go up. This however, would lead to other unpredictably negative economic results. “Higher interest rates tend to lead to lower stock market returns,” says Gus Faucher, chief economist for PNC Financial Services Group. This is because higher rates increase the cost of borrowing.
But lower stock market returns bode well for gold. Gold tends to move opposite to what the stock market is doing, which makes it a good hedge against the ups and downs of stocks and also the low returns of bonds.
Do these 100-year bonds sound like “safe” investing?
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Back in the day, I was an equities trader. Cashed out in ’98 and did some FOREX speculation and short-term notes and bonds for income yield, hedging with gold in ’02. Went well. Cashed out of gold too soon, got rid of the bonds a while back and put it all into wholly-owned property and productive tanglbiles, keeping some solid interest-bearing instruments that provide a small but relatively secure passive-income stream. The latter are being phased out as the tangibiles produce a better return. Self-sufficiency to the degree possible is the plan going forward. Once one comes to grips with a more austere lifestyle, the big picture changes. My young-‘uns have different needs, but they’re adapting. Granted, I don’t live in the USA and neither do they. Truth told, I have no faith in the financial systems of ANY nation and want to have as little to do with them as possible.
I’m into tangibles too. I build an Ar15 or 80% G19 every couple of months. Along with ammo and mag purchases, my tangibles will be worth infinitely more than property or interest-bearing whatever. You are definitely correct about the austere lifestyle. Best of luck wherever you are. You’re gonna need it!
Admin, Mr. Quinn, our indomitable hero here, (seriously), gets a well deserved positive comment in this article below. The notes regarding our debt based fiat currency system run by the unaccountable Mafia style, “Global Vampire Squid”, the FED, creating the recurring cycles of Boom and Bust, seems on track to the next phase of Bust. NEVER forget that the ONLY mandate of the Central Banksters is to insure the profits of the member banks, and then bail them out when they go bust.
All the hokum pablum pushed for the politicians and Sheeples, of a mandate for full employment, with employment numbers just another lie, like all government stats, is just part of the “Tragic Comic Opera” for the stealing rights of the banks.
https://www.naturalnews.com/2019-09-03-beware-facts-matter.html
Assuming a new 100 year bond is issued at a rate more than half again as much as the 30 year (let’s say 4.0%), it would have a duration of roughly 25. what this means is for every increase in market rates of 1% after issuance, the market value of your hundred-year-bond would decrease by roughly 25%. and the Fed determines these rates. so, again roughly, a 2% rate increase would cause market value to drop by half. an increase from 4 to 7% would cause a market value drop of 75%. at this point or after, the Fed could print money for nuthin’ and buy back those 100 year bonds in the market at 25 cents on the dollar. caveat emptor!
roughly
Will America be here 100 years from now ? If you read the plans Albert Pike put in a letter we are heading for another World War .The real rulers have been planning for this over a hundred years. Might be best just to have silver ,gold and some cash put away unless they outlaw silver, gold and cash.
You … B.B. KNOW WHO to put your faith in. We are probably heading for a global society dominated by total control. That would in all likelihood include the inability to buy and sell outside the purviews of what ‘they’ deem allowable. I’m not saying don’t own any gold and/or silver. Just don’t totally expect that doing so will save you. We are entering uncharted territory. Interest rates are at 5000 year lows. Let that sink in. To suggest we will return to normalcy (our version) while appealing seems to also be wishful thinking
The 30 year is about 2%. A 100 year bond would probably yield more – about 2.05%.
We live in an economy now and not a society.