How the USA Debt Settlement will be reached in a not too distant future.

At some point in the next decade US Treasury will “adjust” the long term bond obligations on its books. In short if an investor is currently holding a 30 year government bond worth $1000.00 dollars, on the day after the “adjustment” is made the value will become 40%-60% of the “pre-adjustment” value at 60% new value would be $600.00. This must not be viewed as a USA default, it must be viewed as the most rational “adjustment” for future prosperity of the USA and the world. Here is why.

  1. In order for USA to prosper in the future, USA will be forced to abandon current “weak dollar” policy and embrace the “strong dollar” policy.
  2. Higher interest rates will follow, but unlike the past such policy changes the higher rates will also work to limit the real potential of the economic expansion. At some point US Government will be forced to “adjust” US Debt Obligations to empower the real economic expansion.
  3. Whenever a relatively small economy gets into a debt crisis and out of control inflation; replacement of currency is one of the commonly applied solutions. Replacement of currency approach is simply not feasible in a world’s largest economy so intensely intertwined with every other world’s economy.
  4. US Debt “adjustment” will make certain that the smallest possible group of people will get hurt, without disturbing the real economy. This group of affected investors by default is not composed of “poor people”. And most will not be substantially affected by the “adjustment”. When an investor is holding a 30 year bond at historically low interest rates, what he is really saying to the government: “I can live without the money”.
  5. Affected investors will not have a sympathetic year of the general population. And other than effected investors being severely upset, it will be a non-event, and even treated as “boom times ahead” by the Wall Street. You can imagine an investor telling someone on the street, I had a million dollars yesterday and today only have 600 thousand.
  6. “Adjustment” of the debt is nothing different than “adjustment” of the housing bubble, except investors holding the long term obligations will have to take their turn at the bat, instead of investors holding mortgages in a real-estate “adjustment”. It is nothing different than a bankruptcy court “adjustments”. Investors holding corporate debt are always happy to get “some part of original debt owed” to salvage the golden goose.

Looking from the international and political view points there is even more reasons why this will be one of the most practical and logical actions US Government can make. Take it into consideration when deciding on your future portfolio allocations.