How to Defuse the Debt Bomb

07/11/2011 10:11 am EST


Terry Savage

Author, The Savage Truth on Money

The risk of a US debt default has been wearing on many readers' minds, so here are a few small things...and one big can do to protect your assets, writes personal finance expert Terry Savage.

The Treasury Department has warned it will run out of money to cover the country's bills if Congress does not raise the $14.3-trillion debt ceiling by August 2. Once again, American exposes its legislative horse-trading process, to the disdain of the civilized world.

It’s one thing for Greece, Spain, or Portugal to come to the brink of defaulting on their debt. And quite another for the United States to allow faith in the dollar to be destroyed in world markets by failing to agree on a real solution to our budget problems.

In recent days I have heard from many worried readers through posts on my Q&A blog at The general concern: What happens to me if the government fails to come to an agreement on the debt ceiling?

  • From John: “What would the consequences be to the average US citizen if our political "leaders" cannot come to an agreement about raising the debt ceiling?”
  • From Frank: “I’m a retired senior and a faithful reader of your column. Should I be concerned about my Social Security, my bank account, my credit union account, and my company pension? Should I be doing anything?”
  • From Howard and Debbie: “We have become more concerned that we will certainly face inflation and possibly a crash of the US dollar...How can we protect our assets? Should we buy gold, silver, or natural resources, and if so, how much? Should we steer clear of government bonds?

Americans have become preoccupied with protecting themselves from the financial follies of our own elected government!

Default Is Not Imminent
First, we're a long way from catastrophe, so don’t make any moves out of panic from media headlines.

Even if the debt ceiling is not raised, there are plenty of accounting gimmicks the United States could employ to continue paying the roughly $18 billion in interest on its debt every month—and also pay out Social Security checks, Medicare benefits, and salary checks to the military.

Yes, they might have to cut back on funding some other projects—but those cutbacks wouldn’t immediately threaten national security, benefits for the elderly, or a real shutdown of government. They do, however, make for good headlines and television stories.
This game of brinkmanship revolves around much larger issues of how to deal not only with current spending—but all the planned future spending. And just like your budget, there are only two ways to balance it out—either earn more or spend less.

Yes, the Federal government does have a third option—to “print” its way out of this financial mess. But that would surely destroy the value of the dollar, and probably destroy America as a global leader. And the world is watching.

So if you really want to be prepared for your financial future, you must plan beyond this manufactured August 2 deadline.

NEXT: Dealing with Financial Uncertainty


Dealing with Financial Uncertainty
It is unthinkable that the United States will default on its debt—even technically. So stay calm, and act rationally. In this messed-up world, short-term Treasury IOUs are still the safest, most liquid asset—as are FDIC-guaranteed bank deposits.

If the government simply “prints” money to deal with its debt issues, the value of all dollar-based assets will decline. That’s the simple definition of inflation. And in a period of inflation, short-term interest rates will rise in an attempt to “keep up” with the diminishing value of the dollar.

You can hedge your bets on the future value of the dollar by buying gold or silver—or currencies of countries that are better run and have an abundance of natural resources. (Canada fits that definition. Euro-land does not.)

If you think there will be more inflation, it is not too late to take a portion of your assets and hedge your dollar exposure through ETFs (exchange traded funds) that specialize in those areas.

Be wary of investing in longer-term bonds, as inflation will make them less valuable—and you don’t want to be locked into a low-rate investment if inflation pushes interest rates higher. What looks like a temptingly higher CD or bond rate now could be a laugher in a few years.

But an excess of money creation could push stock prices higher, as that newly created money (credit) seeks a home in real assets. In fact, this is partly the cause of the stock-market rally we’ve seen recently—global money looking for a safer place than Euros and a higher-yielding opportunity than Treasury bills.

There is no one answer to your questions about financial security, and it is always unwise to go to extremes. But it does make sense to watch carefully, and understand your alternatives.

Remember that as tough as things look now in our budget crisis, when global money gets scared it still runs to the relative safety of US Treasury bills and equities.

The only good thing to come out of all these media headlines is the possibility that Americans on both sides of the economic divide—those who pay taxes and those who collect benefits—can and will unite in an outcry against the dithering in Washington.

The one action you should take now is to send a message to your representatives in Congress to put aside their politics and get this issue settled in a sensible way. We all have a huge stake in making sure that our money retains its value, and that America retains its global financial strength.

And that’s the Savage Truth.

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