safest govt. debt?

Discussion in 'Economics' started by trader56, Dec 27, 2005.

  1. Let me start by saying I've done no research on this other than as a sort of "thought exercise," but I'd be interested in opinions.

    It is always claimed that U.S. goevernment debt is assumed to be "riskless" - at least this is what I was taught long ago in Econ and Finance classes. Personally, I was skeptical of this statement then, and even more so now.

    Regardless of whether you're a liberal or conservative, the fact remains that the U.S. has gone from budget surplus to deficit in the last few years. Added to this is the potential liability of Social Security as the Baby Boom generation comes of retirement age, and the newly-created presciption drug benefit liabilities, to mention just a few.

    Which countries might be said to have a more stable outlook, and thus, perhaps less risky govt. debt?
    Another way to look at this might be to ask which country's govt. bonds might be as safe or safer than U.S. debt as an investment?

    Interested in thoughts - and thanks!
  2. The U.S. government will never default on its debt no matter how bad things get (check during the Depression) so I think it can still be classified as risk-free...
  3. DrChaos


    The "risk" there is not default---since the US can conceivably print as many dollars as needed if they revoke the Federal Reserve Act or modify it.

    The risk of course is inflation that would cause.

    If you care there, then the TIPS (inflation protected securities) would help but the inflation index used is probably biased down.

    I would take a look at government bonds in stable resource-heavy/population-light nations: Canada + Australia + Norway.

    There's always Switzerland but yields are extremely low.

    Get a basket.
  4. No security is riskless. Swiss Bonds may be less risky than US.
  5. Swiss treasury - won't pay much but the currency hedge is strong
    the US will always pay it with increasingly crappier dollars - take your pick.
  6. I like Ginnie Maes. Not the safest but I like the risk/reward.
  7. When I was thinking about this, it wasn't so much that outright default on U.S. govt debt was such a big concern as much as increasing yeilds needed to continue to make U.S. debt attractive to foreign investors.

    If investors percieve that risk has increased due to any number of factors, then it would seem that they would demand higher yeilds as a sort of "risk premuim." This could then increase the debt and interest to be paid back, further eroding the prospects for the furture.

    What do you all think?
  8. DrChaos


    Sounds like exactly what has happened to many countries in the emerging markets, in part thanks to the IMF's poor policies combined with the local government's corruption.

    Situation goes like this: (Indonesia, etc)

    1) Economy does well, but corrupt government is in power and steals lots of money for its clan (crony capitalism) and runs up big debts. People don't really mind as long as they're getting rich, or think they are. {Sound familiar?}

    2) External shock, and suddenly the currency goes down and interest rates on debt goes up. Hard times, and panic.

    3) (This is where the IMF steps in and screws the pooch.) IMF says, "you nutbags, you aren't paying your debt. We'll make you an offer you can't refuse. Put in a strict, clean, government, raise taxes like crazy to regain 'confidence in your currency' and then the foreign investment will come back and everything will be OK. Otherwise you will be locked out of international commerce forever."

    4) Country puts in strict clean government, raises taxes like crazy in the middle of a recession. The predictable reaction: huge economic collapse, riots and political turmoil. ("We are slaves to Yankee bankers!")

    5) World markets now say, "Hey you are in a huge recession and political turmoil! No way in hell will we invest there. Are you nuts?"

    6) Country collapses more, and strict clean orthodox capitalist governments are discredited.

    After the 1998 crisis, the Asian countries decided "Never Again" to being in thrall to the IMF. That's why they are accumulating so many dollars, to tell the IMF to stuff it.

    Also, Argentina fairly recently told the IMF to go fuck themselves, and their economic recovery has been fairly swift and strong for the last couple of years.

    There have been some notable economies which for decades have ignored the IMF's advice and money: South Korea and China. Seem to have turned out well, right?

    Going back to the original question, it is not clear that for a developed market economy that the bonds would in in fact shoot up in yield becauase of risk premium. Look at Japan---their debt/GDP is now very bad, as well as their demographics (they are aging fast and still xenophobically opposed to immigration). And yet nominal yields are astonishingly low because of deflation, very significantly in property.
  9. Thanks, DrC for a very interesting response and ideas!