Protect your investments in case of default.

You know that match is getting closer to the gas tank when USA Today runs a personal finance article about protecting your investments in case of a U.S. default. Their advice: " The overwhelming likelihood is that Congress will eventually act and the U.S. won't default. Until it does, you can expect increasing volatility in the stock, bond and commodity markets. If you're tired of the roller coaster, consider moving some — not all — of your portfolio into short-term money market securities or bank accounts. You should have enough cash available for your short-term living expenses, anyway." There are other options, and they explain more fully here:


If U.S. defaults on debt: How to protect your investments

I've run across some other fascinating information about our debt. Quick quiz: Who owns a majority of the U.S. debt?

As Eugene Robinson of the Washington Post points out in his column yesterday: "Contrary to popular impression, going into default would not be just a matter of stiffing the autocrats in Beijing. Less than a third of the $14.3 trillion national debt is owed to foreigners — roughly 10 percent of the total to China. The biggest chunk, about 40 percent, is owed to U.S. individuals and institutions. Another 25 percent or so is owed to the Social Security trust fund, the U.S. Civil Service Retirement Fund and the U.S. Military Retirement Fund. In a sense, we would primarily be stiffing American retirees, including veterans." 


What about those who say that it's no big deal if we default? The problem is that many of them actually believe this to be true. Here are two columns which should put this to rest:


1) Jonathan Capehart opened his Washington Post column yesterday with this paragraph:
"Please ignore the nonsense coming from Rep. Michele Bachmann (R-Minn.) and a certain celebrity who served two years as governor of Alaska before becoming a best-selling author and reality television star. And please pay attention to how the bond ratings agencies are reacting to the inability of “leaders” in Washington to come to an agreement on lifting the nation’s debt ceiling. This is not a game, folks. Yesterday, Moody’s put the United States on notice. Our credit rating is under review. A downgrade from AAA to AA is possible. I pointed out the scariness of this possibility earlier in the day yesterday. The CliffsNotes version: the potential loss of 1 million jobs." Here's the link to the complete column:


http://www.washingtonpost.com/blogs/post-partisan/post/danger-of-default-bachmann-and-palin-dont-get-it/2011/03/04/gIQA3GZLEI_blog.html

2) Sarah Palin appeared on the Sean Hannity Show Wednesday evening and said" If I were in Congress, I would not vote to incur more debt,” she asserted. But she also said, “We cannot default.” But then she also said: “We cannot afford to retreat right now." 


She went on to say: "There are departments that can be revamped and some bills that can wait. And, again, it's our president's job, as the leader of the executive branch, to prioritize and administer those dollars that Congress has allocated. And our president obviously isn't capable of doing that, because he has no plan that he can even put forward to say here are my priorities."


The Washington Post sent this to their fact-checker, and he came up with a column that does a masterful job of explaining what the debt ceiling is, where it came from, how making an analogy to your family budget and your credit cards doesn't work when talking about the debt ceiling. Not surprisingly, they wound up awarding Ms Palin 3 Pinocchios on a scale of 0-4. Here's the link to the column:


http://www.washingtonpost.com/blogs/fact-checker/post/sarah-palin-and-the-debt-limit-debate/2011/07/14/gIQAsSbgEI_blog.html?hpid=z1

3) The "in-the-know" folks on Wall St. are saying that any downgrade in our credit rating (even from AAA to AA) could raise the interest on our debt by anywhere from 0.25% to 1%. Well, that doesn't seem like much, right?

A 0.25% increase in our interest rate adds $40 billion/year to our deficit. If we eventually go with the $1.7 trillion in spending cuts--with no revenue increase--that has been proposed, a 1% increase in the interest rate we pay on our debt will wipe out virtually every dollar of those spending cuts. Less for Social Security, Medicare and Medicaid with absolutely no decrease in our deficit. That's playing with fire.