Protect against government debt default

Any lack of agreement on how to handle the problem does not mean that the nation has any near-term difficulty raising money. Default under the traditional approach would come about if borrowers refused to lend us more money. The current low interest rate on U.S. debt-although due in part to the Federal Reserve buying much of the debt being raised and the government printing money to finance it-suggests that foreigners are willing to continue purchasing our government's debt.

POLITICAL JOCKEYING

The potential for one or both leading credit agencies to downgrade our AAA debt rating could itself raise rates. The higher rate paid on money the government borrows could replace dollars that otherwise could be spent on improving U.S. competitiveness. Alternatively, the government could launch a third round of quantitative easing that, if sustained over time, could be highly inflationary and raise rates as well.

STEPS YOU CAN TAKE

If you're concerned about default, you can take several steps, including:

Some investment vehicles for protection include:

A WORD OF CAUTION

I believe a deal on the budget either before or just after the next election is possible, but a word of caution: A budget agreement could result in a broad-based rally in the dollar, which already has depreciated significantly. If that happened, diversifying out of the dollar and into foreign-based funds or commodities would harm a portfolio, because non-dollar currencies and commodities probably would underperform dollar-based investments.

The author is president of Altfest Personal Wealth Management, a financial and investment advisory firm in New York City; an associate professor of finance at Pace University; and a Medical Economics consultant. The ideas expressed in this column are his alone and do not represent the views of Medical Economics. If you have a comment or a topic you would like to see covered here, please email medec@advanstar.com
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