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Timothy O'Rourke
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Timothy J. O'Rourke is an individual investor who is interested in creating income from the stock market and learning what others think about his ideas from the online community at Seeking Alpha! The tagline for Seeking Alpha says it all; read, decide, invest... (maybe not all, I would add... More
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  • Debt Crisis--Revisited
    Barron's today had a great article online that stated:
    • In June ( the current reporting month) foreign investment in long term treasuries decreased by 11.5 billion, the first decline since January 2009
    • foreign investors purchased 61.3 billion dollars worth of debt more than they sold in the fist half of 2011, the lowest amount in 18 and a half years
    • China, the largest foreign investor of treasure debt, only purchased 5.4 billion dollars worth of debt in the first half of 2011.
    To read the full article click here: http://online.barrons.com/article/SB50001424052702303858904576514560633990674.html?mod=BOL_hpp_oe&_nocache=20110818103603.



    Aug 18 11:49 AM | Link | Comment!
  • The Lasting Impact of the U.S. Debt Crisis

     

    Every year when the Pentagon’s assessment of the Chinese military is released, I am reminded of an article published years ago in the New York Times that discussed the United States’s adversaries’ view the of the First Gulf War.  These adversaries - the former Soviet bloc - took a resulting hard look at their own militaries after the U.S. deftly defeated Saddam’s armies. They realized that the U.S. could just as easily beat any army that was based on the old Soviet model.  This defeat made the Chinese government realize that a military based on quality and mechanization, instead of one based on quantity of soldiers, was needed.  The resulting changes they have made are substantial: they thinned their ranks by millions, decreased the size of their military’s leadership by half, established a Navy by purchasing ships and submarines from countries with more advanced technologies, and created a state-owned military equipment industry that has produced the first Chinese fighter jet.

    Similarly, there could be unintended consequences of the United States’s inability to resolve the debt crisis until the day before possible U.S. default.  Other world powers who were eager to invest in U.S. Treasuries  may reevaluate where they invest extra cash and how they carry out international business because our leaders have now shown that it is possible for the U.S. Treasury to default on its debts.  Likewise, central bankers may choose to pursue alternative investment opportunities that once seemed more risky than investing in U.S. Treasuries.  Therefore, the real problem was never if we default on our debts August 3, but the consequences of giving world leaders and their central bankers a reason to pause when considering investing in U.S. Treasuries as they draw up long term economic plans for their countries.  Interestingly, individual U.S. investors who choose to continue to invest in Treasury Debt will be paid a much higher return than current interest levels.

    Other nations eager to see themselves rise on the international stage have been laying the groundwork for the United States to play a smaller role in global politics and economics.  In order for this to happen, two economic events must take place: a global currency must be adopted to rival the U.S. Dollar, and another investment must take the place of U.S. Treasury Debt as the preferred investment for public funds.  On July 29th, a “Senior European Policy-maker” was quoted in the New York Times article Global Concern over U.S Debt Ceiling Agreement questioning “why the United States Debt is treated any better than a country like Portugal, which has about the same levels of deficit and debt.”  Here is a link to the article: Global Concern Over U.S. Debt Ceiling Disagreement - NYTimes.com.  One must ask why the same European official would continue to invest in U.S. Treasurys if he or she views the debt to not be of superior quality.  In the same article another “Senior European Policy-maker” was quoted as saying “there are limits to cutting back [on US Treasuries] because other large bond markets, in Europe and Japan, are not nearly as liquid.  As long as the dollar remains the dominate currency there’s little choice for many in the public sector but to hold U.S. debt.”  As a remedy to this, the Chinese and the French (through the International Monetary Fund [IMF]) have both called for new international currencies to rival or take the place of the U.S. Dollar in international business.  

    Steps have already been taken to initiate the long process of creating large pools of other currencies.  Paul Krugman noted in his blog, The Conscience of a Liberal, that “Chinese President, Hu Jintau, has questioned the dominate role of the U.S. dollar and stated that the dollar’s role as an international currency is a product and reflection of the past.”  Dr. Krugman’s Blog can be accessed at http://krugman.blogs.nytimes.com.  On January 11, 2011 the IMF released a report titled Enhancing International Monetary Stability-A Role for the SDR? calling for a dollar alternative to further stabilize and diversify the global economy.  If these changes are embraced by foreign world powers, U.S. currency is a few short steps away from losing its world dominance, and foreign governments’ preference to invest extra cash in U.S. debt could be compromised.  The IMF paper referenced can be read here: http://www.imf.org/external/np/pp/eng/2011/010711.pdf

    There will be profound changes for U.S. citizens if the U.S. currency loses its current status.  U.S. citizens have prospered by the influx of foreign investment capital.  It has spurred job growth in the United States and increased the average worker’s salary while also increasing the amount and variety of consumables available for them to purchase, i.e. it has increased their buying power.  As a result, upward mobility through the classes has increased and allowed the middle class to grow to its current large size. 

    There will be a silver lining for future investors of U.S Treasury debt, though.  The interest paid by the Treasury will have to increase dramatically to compensate for the increase in perceived risk and decreased demand abroad.  Individual U.S. investors should be vigilant over the coming months to be on the lookout for the changes mentioned in this article.  When these international practices begin to change individual U.S. investors should invest in Treasuries because the interest paid will increase dramatically!

    The prolonged debt ceiling debate, now labeled a crisis, has given the United States’s adversaries an opportunity to seize upon the U.S. government’s inability to come to a timely compromise and question whether U.S. Treasury debt should be the preferred debt of the world’s central banks.   The prolonged debt ceiling debate has given momentum to the argument that U.S. Treasuries are not as safe as previously thought and the world should have a new international currency to do business.  These proposed changes, if adopted, will have profound implications on the United States’s economic and political dominance as well as negatively impact the jobs available to ordinary U.S. citizens and the wages provided by those jobs.   The silver lining for U.S. investors is the Treasury will be forced to increase the yeild of its debt dramatically to compensate for the increased risk and decreased demand for its Debt products.

     



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Jul 31 8:27 PM | Link | Comment!
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