US Default on Treasury Bonds

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US Default on Treasury Bonds

Post by doodle » Tue Jun 21, 2011 5:44 pm

I think this author makes a strong argument regarding the high possibility of default down the road.
http://www.econlib.org/library/Columns/ ... bills.html

As things currently stand it looks like the sacrifices to get our fiscal house in order are going to have to be of a magnitude comparable to the way Americans came together during WWII. I'm not saying this is impossible, but if we fail to get the right leader who can pull us together and move this country forward, I think we are just going to continue to kick the can down the road until we truly do have a debt that will require a choice between a lifetime of austerity and sacrifice or simply a default.

My generation and that of my children (in 10 years time) will have a hard time stomaching the idea of sacrificing their future for their parents and grandparents grotesque fiscal irresponsibility. I think this new generation of voters will be more prone to repudiating the debts of their parents in order to loosen the strangle hold that debts inevitably put on future growth and investment. Being that this generation has little to lose they will take a much more radical view on wiping the slate clean and moving forward.

Default is not an uncommon thing and many of the countries who went through debt restructuring 10 years ago are some of the fastest growing economies of today.

I believe that if Harry Browne were alive today he would be rethinking his 25% split in light of the shift in risks that lie ahead.
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Re: US Default on Treasury Bonds

Post by craigr » Tue Jun 21, 2011 5:48 pm

Please keep in mind that this prediction has been around for probably 50 years. It will probably happen one day, but it could be another 50 years from now. Or it may not pan out quite like we think it might. The British pound for instance went through a painful decline in value but still is with us today. Harry Browne was very well aware of these problems but still thought the 25% allocation was the best way to go due to the uncertainty of the timing or knowing how it will go down if it does.
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Re: US Default on Treasury Bonds

Post by moda0306 » Tue Jun 21, 2011 5:49 pm

I think with the dollar being the world reserve currency, if problems start to happen, gold will do  more than enough at 25%.

If we were zimbabwe... maybe not.  The dollar is used throughout the world.  Gold is fine at 25% IMO, in fact of the 3 volatile assets I think it's the one that one could argue most doesn't need to have as strong of an allocation to do its job.
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Re: US Default on Treasury Bonds

Post by MediumTex » Tue Jun 21, 2011 6:09 pm

And remember that underlying economic conditions are simply NOT inflationary right now.

Without inflation and dollar devaluation I don't know what the catalyst for default would be.

What would the catalyst be?

Foreigners still need a place to recycle dollars.

Can anyone think of any historical precedent for the largest economy in the world with the world's reserve currency and most powerful military defaulting on its sovereign debt?  I can't.

It could happen, but the question is always "who benefits?"  Given the large stake that the whole world has in the dollar and the treasury market I don't see how it would be to anyone's benefit to see a default on U.S. debt.
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Re: US Default on Treasury Bonds

Post by doodle » Tue Jun 21, 2011 7:21 pm

As far as who benefits from a default I think the answer would be your children. Other countries that have defaulted or restructured in the past have actually seen a rather quick renewal of economic growth. Of course borrowing costs would be higher going forward but I doubt anyone is going to be in the mood to borrow when they have just come out from underneath a huge pile of debt.

According to the CBO even with the austerity measures that the congress is talking about in the Ryan plan we are still looking at adding another 8 trillion to the debt over the next decade. The Ryan plan is also based on a projected continuation of historic growth rates of around 3.5% and future unemployment rates at 2.8% which I find very optimistic. At this point our national debt if everything goes according to "plan" would be some 23 trillion dollars.  

This national debt of course doesn't include the 50 trillion dollars of unfunded liabilities related to medicare and social security that my generation will be straddled with as well. At a certain point the younger generation will be working solely to pay off their parents debt and fund their retirement and medical care. I am only 29 years old and I can tell you that as crazy as it sounds if I am facing a lifetime of paying down my parents debt I would vote to default no matter how many economists tell me it would be devastating. I probably would do it more out of the moral injustice of paying for my parents profligate ways than anything else even if it does come back to bite me.

I am not saying that this debt issue is only related to the dollar. The Euro and Yen are facing similar if not more severe issues. I think we could see an unprecedented decade ahead of us in terms of debt collapse. Although this is deflationary, if LT treasuries are the instrument that is collapsing are they really the best place to be at that point?
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Re: US Default on Treasury Bonds

Post by doodle » Tue Jun 21, 2011 7:29 pm

Yet another argument in favor of default: http://www.guardian.co.uk/commentisfree ... bt-default This time in the case of Portugal.
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Re: US Default on Treasury Bonds

Post by AdamA » Tue Jun 21, 2011 8:00 pm

doodle wrote: As far as who benefits from a default I think the answer would be your children.
In an altruistic way, yes.  But I think the point MT is trying to make is that there is no selfish reason for anyone in a position of power to decide that we should default on our debt.  It would not be beneficial to those in charge of making such decisions.
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Re: US Default on Treasury Bonds

Post by doodle » Tue Jun 21, 2011 9:50 pm

What happens when my generation takes the reigns? The passing of the torch....or the bill in this case. Default might be politically popular stance.

I think it will be interesting to see how Greece and other European countries unfold as well as Japan in the near future. We might get a glimpse at the reality that faces us pretty soon.

I think the word catastrophic is a little exaggerated. Defaulting on debt is not going to be like a nuclear holocaust or anything. Life will go on. I am starting to see this as a very viable solution to our problems in the west. Default....restructure however you like and move forward.

People declare bankruptcy all the time.
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Re: US Default on Treasury Bonds

Post by moda0306 » Tue Jun 21, 2011 10:09 pm

Why would we default when the fed could literally print the money to purchase debt issued by the treasury?

I think you are thinking of things in terms of a revenue/debt-constrained government, not one that holds the trump card over its own debt-holders.

I am much more worried about our private-sector debt than public-sector debt.
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Re: US Default on Treasury Bonds

Post by doodle » Tue Jun 21, 2011 10:46 pm

Well, printing your way out is a form of default as well....its just known by a different name.  Either way, I am really very skeptical....extremely skeptical... that we are just going to tighten our belts, put our noses to the grindstone and cut 1.5 trillion dollars from our economy right now through reduced govt spending and figure out a way to pay the 50 trillion plus promised in medicare and social security benefits over the next 20 some years. Is there anyone here from my generation? I can't speak for all of us 20 somethings, but austerity and focused work ethic isn't exactly the words that I would use to define my generation.

I have come full circle on this issue. At first it gave me a lot of concern. Lately, I just view it in more of an absurdist light. I mean, we have military bases in 150 countries and nearly 100,000 troops stationed in Europe doing God knows what, while at the same time my school district is laying off teachers left and right because of extreme budget shortfalls. This is like a Mel Brooks comedy....totally absurd.
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Re: US Default on Treasury Bonds

Post by Gumby » Tue Jun 21, 2011 11:02 pm

Doodle,

Don't confuse the debt of local governments (or debt from countries such as Greece) with that of US Debt. They are very different animals. A country like Greece can't print more money if it needs to. A local government can't print more money if it needs to. Those types of governments can default in a very painful way.

But, ever since the US came off of the Gold Standard, US debt cannot default because there is now an unlimited amount of money. There is no comparison anymore.

It helps to turn off the media when it comes to US debt. It's a very complex subject and I have yet to see any media outlets correctly analyze US Debt from all angles. Most often media outlets will project a political agenda when talking about US Debt. The article you cited was published by a foundation devoted to limited government. It was biased before it was even written.

I find that it helps to study all of the different angles. Take a look at this comparison of views on Debt in a fiat economy.

http://cas.umkc.edu/ECON/economics/facu ... mpared.pdf

Now, it sounds like you are a Deficit Hawk. And that's fine. You're entitled to your opinion as much as anyone else. But, it helps to consider that Deficit Hawks may be wrong. It's entirely possible that the Functional Finance View is correct, and the size of the deficit may not matter in the long run. I'm not saying that the Functional Finance View is correct. I'm only saying that the Deficit Hawks may be wrong. None of us know for sure, and the media will definitely not help you figure out which view is correct. The size of the US Debt may matter. Or it may not.

There's no sense worrying about it. Just hold your 4 PP assets and enjoy life!
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Re: US Default on Treasury Bonds

Post by MediumTex » Tue Jun 21, 2011 11:02 pm

doodle wrote: This is like a Mel Brooks comedy....totally absurd.
I think they used to call them "screwball comedies".

The thing to always remember, though, is that things that look to be on the verge of collapse can often linger for a LONG time, seemingly about to fall apart, but never actually falling apart.

A lot of chronic drug and alcohol abusers are like that--you will see them one day and swear that they won't live another week, but then you will see then months or years later and they still look like hell, but they aren't dead, they just keep living.
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Re: US Default on Treasury Bonds

Post by doodle » Tue Jun 21, 2011 11:24 pm

I don't think I am a deficit hawk or dove. I think you just need to look at what medicare and social security have promised to pay out in future benefits to see that we have a big storm brewing. Someone is going to get defaulted on....we're either going to keep up the deficits and my generation will eventually default on debt to bond holders or the baby boomer generation is going to get defaulted on by having their promised benefits cut.

It really is that simple. It is a ponzi scheme and my generation is supposed to be the morons at the bottom of the pyramid.  Sure there are a lot of economics that get in the way of the simplicity of the issue but once you strip away all the noise it is crystal clear.

Don't let anyone muddy the issue. Someone is going to get defaulted on. It is just a matter of time.
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Re: US Default on Treasury Bonds

Post by Gumby » Tue Jun 21, 2011 11:33 pm

doodle wrote: I don't think I am a deficit hawk or dove.
My apologies. But, you just sound a lot like a deficit hawk.
doodle wrote:I think you just need to look at what medicare and social security have promised to pay out in future benefits to see that we have a big storm brewing. Someone is going to get defaulted on....we're either going to keep up the deficits and my generation will eventually default on debt to bond holders or the baby boomer generation is going to get defaulted on by having their promised benefits cut.
For the record, I am part of your generation. I agree that it is scary. Cuts will have to be made to satisfy the prevailing agenda that wins the most votes.
doodle wrote:It really is that simple. It is a ponzi scheme and my generation is supposed to be the morons at the bottom of the pyramid.  Sure there are a lot of economics that get in the way of the simplicity of the issue but once you strip away all the noise it is crystal clear.

Don't let anyone muddy the issue. Someone is going to get defaulted on. It is just a matter of time.
So, tell me. If the deficit hawks are correct, and the size of the US debt is so out of control that we are all doomed, then it stands to reason that the bond market should be extremely concerned as well.

And yet, it's not.

Why do you think that is? Why aren't the yields of 30-year Treasury bonds soaring? I mean, if the deficit hawks are so obviously correct, the US doesn't even have 30 years left! So you'd think the yield of a 30-year bond would be at 20% by now. That's just not the case in reality.

So, I think it helps to at least consider the possibility that the deficit hawks may be wrong. It's entirely possible that the size of the debt may not matter under certain economic conditions. You just don't know for sure. And if you're right, why doesn't the bond market agree with you??
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Re: US Default on Treasury Bonds

Post by doodle » Tue Jun 21, 2011 11:51 pm

Hawks or doves are just labels obscuring the issue that we cannot fund our future promised obligations without having enormous growth or greatly increased taxes. If either of these doesn't occur someone is not going to get what they were promised. Default comes in many flavors.....boomers don't get their benefits, bondholders will not get positive real yields, or eventually if the debt gets large enough bondholders get returned pennies on the dollar.

I guess bond yields haven't soared because we are in a deflationary environment and there is confidence that we will put our fiscal house in order. The Fed has also been pretty active buying up bonds as well. In addition, the rest of the world looks pretty ugly as well. But just because they are ugly it doesn't mean you are pretty.

We are between a rock and a hard place. There is NO easy way out. Any politician that tells you that this won't require a fair amount of sacrifice and pain is telling a bald faced lie.

I think that the next 5-10 years will see a lot of very interesting maneuvers to get out of debt. I am especially curious about Greece because I think it is going to set the tone for the rest of the world.
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Re: US Default on Treasury Bonds

Post by Gumby » Wed Jun 22, 2011 8:27 am

doodle wrote:Hawks or doves are just labels obscuring the issue that we cannot fund our future promised obligations without having enormous growth or greatly increased taxes.
You are just expressing a view of Keynesian economists (e.g. Paul Krugman) who believe that unless the Federal government runs a surplus in good times, it will run out of money in bad times. Not all economists believe that the US government needs to follow that formula. You may believe it, but that doesn't make it a fact. The fact is that, unlike Greece, or a state/local government like California — which all can run out of money — the US government (as well as Japan) can never run out of money. That makes them impossible to compare.
doodle wrote:If either of these doesn't occur someone is not going to get what they were promised. Default comes in many flavors.....boomers don't get their benefits, bondholders will not get positive real yields, or eventually if the debt gets large enough bondholders get returned pennies on the dollar.
Um... Or we may see a long and endless deflation, like Japan. You don't know. You can't know.
doodle wrote:I guess bond yields haven't soared because we are in a deflationary environment and there is confidence that we will put our fiscal house in order.
But all those articles you've posted say otherwise. Surely they must be correct. They must know the future. It seems so obvious, and yet...
doodle wrote:The Fed has also been pretty active buying up bonds as well.
Exactly. They are printing money. And they can continue to do so as long as unemployment remains high. Now you're starting to see where this is going. Consider an endless series of QE's for generations to come. Deflation with no hope for recovery. It's a possibility you can't (and shouldn't) deny.

Japan gets its debt downgraded by S&P and guess what happened to its bond yields? They went down. Why do you suppose that is?
doodle wrote:In addition, the rest of the world looks pretty ugly as well. But just because they are ugly it doesn't mean you are pretty.
Call it what you want. The bond market says that US Debt is still the best horse in the glue factory. It may be so for decades to come. You don't know.
doodle wrote:We are between a rock and a hard place. There is NO easy way out. Any politician that tells you that this won't require a fair amount of sacrifice and pain is telling a bald faced lie.
I agree with you. I just think you need to consider that you may have the outcome wrong. You seem so sure of yourself, but none of us have a crystal ball. That's why you need the PP.
doodle wrote:I think that the next 5-10 years will see a lot of very interesting maneuvers to get out of debt. I am especially curious about Greece because I think it is going to set the tone for the rest of the world.
Greece is like a local/state government. Greece can run out of Euros. The US government cannot run out of dollars (much like Japan cannot run out of Yen). Greece and the US aren't the same. Greece bond yields are soaring. US bond yields are dropping. Think about it.
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Re: US Default on Treasury Bonds

Post by moda0306 » Wed Jun 22, 2011 9:09 am

If we are in DIRE situations at 90% debt/GDP ratio, what type of horrible situation is Japan in at 200% debt/GDP.  I'm quite sure they had entitlements to pay to the elderly when they hit their retirement demographic bulge.

Interestingly, their interest rates are about half of what ours are... making their debt servicing about the same cost.

Also, inflation MAY be a form of default, but it's a form all the borrowers of the USD accepted when they borrowed money.  A hard default would set a panic... today we're soft-defaulting every day and look at the interest rates our lenders are accepting.

Regarding SS & Medicare, these will be difficult, but not, IMO, in such a way that will put us in a position to default.  I more see it as actually being more deflationary to the general price level outside of food and medicine.  It's pulling money out of our general economy and giving it to people that will spend it on medical care, food, and rent.

If we want to look at these as funded by the payroll tax that funds them, then fine, but realisticly that's just fuzzy accounting.  They're entitlements that Americans value overall... this isn't a moral statement but a factual one... these programs are simply unlikely to go away or change significantly.  If the increase to the overall spending budget demands more borrowing, our country will do so, and that will bring us right back to the observations about default and inflation.
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Re: US Default on Treasury Bonds

Post by Lone Wolf » Wed Jun 22, 2011 9:47 am

I completely agree that we've made one heck of a mess for ourselves.  We've spent a lot of money on a lot of foolish things, government is much, much too large, and we'd be wealthier today if we had behaved differently.  If you are in need of any validation on that point, I think you'll find most of us here in violent agreement.

Harry Browne saw it the same way back in the mid-2000's (and before).  Yet he never suggested dumping LT government bonds from the Permanent Portfolio.  If anything else, the flailing of today's politicos has made the water so choppy that a Permanent Portfolio has never seemed like a better idea.

Have you downloaded and listened to all of his old radio broadcasts?  Craig has them archived as well as pointers to the original archives on Browne's site.  I give them my highest recommendation.  It's an opportunity to take a calm stroll through recent financial history as he experienced it as an investor, speculator and thinker.  He answers some of the exact questions and "what-ifs" that are plaguing you today.  They are a wonderful listen and more relevant than anything you'll have barked at you on CNBC.
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Re: US Default on Treasury Bonds

Post by doodle » Wed Jun 22, 2011 10:01 am

Inflation isn't my main worry with regards to long term bonds...it is deflation. Deflation means shrinking tax revenues from high unemployment. This is very destablizing when a country has a huge amount of unfunded liabilities that depend on taxes being collected from a rapidly growing economy with low unemployment. aka...ponzi scheme.

If our economy goes into a deflationary tailspin and unemployment spikes, housing prices fall, and tax revenues decline we are going to be in a world of hurt. Servicing the debt is not the scary part for me at the moment as it makes up a relatively small amount of the total govt expenditures.....it is the political instability that will be caused by high unemployment and little to no money to fund promised future benefits to seniors.

The question is whether or not our political leaders can dish out the reality to their constituents or whether they will continue to "extend and pretend". If business as usual continues you can bet that we will look like Japan very soon. My guess is that they (the Japanese)will be unable to continue to fund govt deficits on the backs of an aging population that is retiring. At that point things crumble.
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Re: US Default on Treasury Bonds

Post by Gumby » Wed Jun 22, 2011 10:13 am

doodle wrote:Deflation means shrinking tax revenues from high unemployment. This is very destablizing when a country has a huge amount of unfunded liabilities that depend on taxes being collected from a rapidly growing economy with low unemployment. aka...ponzi scheme.
Our government does not rely on taxes to fund its obligations (nor does Japan). If it did, we'd be in serious trouble. I think this is the part you are missing.
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Re: US Default on Treasury Bonds

Post by MediumTex » Wed Jun 22, 2011 10:24 am

doodle wrote: Inflation isn't my main worry with regards to long term bonds...it is deflation. Deflation means shrinking tax revenues from high unemployment. This is very destablizing when a country has a huge amount of unfunded liabilities that depend on taxes being collected from a rapidly growing economy with low unemployment. aka...ponzi scheme.

If our economy goes into a deflationary tailspin and unemployment spikes, housing prices fall, and tax revenues decline we are going to be in a world of hurt. Servicing the debt is not the scary part for me at the moment as it makes up a relatively small amount of the total govt expenditures.....it is the political instability that will be caused by high unemployment and little to no money to fund promised future benefits to seniors.

The question is whether or not our political leaders can dish out the reality to their constituents or whether they will continue to "extend and pretend". If business as usual continues you can bet that we will look like Japan very soon. My guess is that they (the Japanese)will be unable to continue to fund govt deficits on the backs of an aging population that is retiring. At that point things crumble.
I don't necessarily disagree with anything you are saying, but of what relevance is it today in terms of actions we as individuals might actually take with our own investments?

You seem to be fully acknowledging the legitimacy of the deflationary scenario, which means you MUST own LT bonds.  Since we already know that the PP is an all-weather strategy, there is no tweaking needed in light of the possible unpleasant future scenarios we are discussing.

Are you just venting about how screwed up the world seems, or is there some specific action that you think would put the individual in a better position than the PP already puts him in?

If you want to read some interesting stuff, take a look back at what Ron Paul was writing around 1979-1981.  The overall tone was similar to what you are writing now, except the concern was inflation rather than deflation, but it was a foregone conclusion that America was in terminal decline, and the only real question was when the inevitable collapse of the dollar was going to occur.  Buying gold was perceived as a safe and obvious thing to do.

In retrospect, of course, all of that advice was almost precisely wrong in every respect.  What would make us think today that our predictions of the future would be any more reliable?
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Re: US Default on Treasury Bonds

Post by doodle » Wed Jun 22, 2011 10:25 am

That is true...taxes really are just a way to force people to use a currency because it is the only method to meet obligations to the government.

Nevertheless, that currency is still subject to the laws of supply and demand. The government cannot just run budget deficits from now to eternity and not expect there to be huge reprecussions. A reserve currency must be somewhat stable. Currently the reason why there is so much demand for dollars is because world commodities are purchased using them. However, we are starting to see countries like China gaining the ability to purchase commodities from Russia in their own currency without having to buy dollars first.

I would argue that if the deficits continue the demand for dollars will continue to decrease leading to loss of reserve currency status which means even more tough times ahead.

I really think that Americans have not fully realized how difficult the road ahead of us really is. The most draconian austerity talks in the House and Senate still do not put us on a path of fiscal sustainability long term.
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Re: US Default on Treasury Bonds

Post by moda0306 » Wed Jun 22, 2011 10:34 am

doodle,

That first paragraph highlights exactly why we want the USD and not some other non-sovereign pegged currency as our deflation hedge.  We DON'T need tax revenues to fund government.  Nor do we really need borrowing to fund it.  That's the trap we aren't in right now that many countries are (PIIGS).

What you're talking about is a Greece or Ireland type situation, where you have deflation (I'm guessing on this)AND rising interest rates... The U.S. is much more primed to work in a much different way.

The USD being a reserve currency and the US being the world's largest economy make the US PP MUCH more "gyroscopic" than others, and I wouldn't have it any other way than with LTT's in the bond slot.  For all it's faults, there's simply no deflation protection like the world's reserve currency that's fully sovereign to the debt-issuer.
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Re: US Default on Treasury Bonds

Post by MediumTex » Wed Jun 22, 2011 10:34 am

doodle wrote: I really think that Americans have not fully realized how difficult the road ahead of us really is. The most draconian austerity talks in the House and Senate still do not put us on a path of fiscal sustainability long term.
Are you aware of any real-life example of austerity measures actually translating into a healthier economy?

Take a look at "The Shock Doctrine" for an overview of several decades of experiments in austerity measures around the world and you may reconsider your views on whether they are actually a solution to the cluster of problems we are discussing.

I don't know what the answer is, but the political instability that normally follows austerity measures makes it hard to see that approach as much of a solution.  Look at Greece right now.  Does that look like a country that is on the verge of anything good happening?  What is austerity really going to mean for them?  I woud say it is probably just going to destabilize things even more.
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Re: US Default on Treasury Bonds

Post by doodle » Wed Jun 22, 2011 10:35 am

MT....maybe a little venting ;D

However, more generally I think that LT treasuries place in the portfolio as a safe haven might not hold true in so far as they government that produces them is facing enormous challenges going forward. I think LT treasuries work well in a deflationary environment but if we become the next Greece or Spain (who are both staring at deflation) would these bonds really be able to protect you? It seems like one should run away from the storm...not straight into it.
All of humanity's problems stem from man's inability to sit quietly in a room alone. - Blaise Pascal
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