Full Faith and Credit of the United States of America

From the New York Times of March 9, 2010:

Companies are quietly and gradually moving their pension funds out of stocks. They want to reduce their investment risk and are buying more long-term bonds.

But states and other bodies of government are seeking higher returns for their pension funds, to make up for ground lost in the last couple of years and to pay all the benefits promised to present and future retirees. Higher returns come with more risk.

Leo Kolivakis of Pension Pulse runs a story on that and asks:

So what are public pension funds doing? Cranking up the risk, investing in failed banks, leveraging up, shoving more money in private equity and hedge funds, whatever it takes to achieve that insane 8% average annual return they’re all still fixated on.

What are they doing indeed. I don’t know, of course, but what if the following was going on.

Private investors, e.g. private equity, private pension funds and hedge funds pile their money into treasuries because treasuries are, according to InvestorWords.com:

Negotiable U.S. Government debt obligations, backed by its full faith and credit. Treasuries are issued by the U.S. government in order to pay for government projects. The money paid out for a Treasury Bond is essentially a loan to the government. As with any loan, repayment of principal is accompanied by a specified interest rate. These bonds are guaranteed by the “full faith and credit” of the U.S. government, meaning that they are extremely low risk (since the government can simply print money to pay back the loan).

So, what do we have here? Private equity, hedgefunds and private pension funds buying treasuries and some of them also buy gold and get rid of equities, while public pension funds and banks buy equities and get rid of gold and treasuries?

Let’s just hope that the equities market is not anihilated, i.e. DJIA=zero, for some reason, otherwise, savings accounts, IRAs, pensions, etc will be wiped out. However, treasuries will not be worthless, even if the dollar is replaced by something else. Why? Because full faith and credit of the United States does mean that this debt must be repaid, as long as the United States exists.
Now you’d still have unemployment benefits, social security, Medicare/Medicaid, right? Maybe, maybe not. Since the debt will have to be repaid with interest and the government is already heavily in debt, it must save. Guess where it will save.

BTW, the loan iteself need not be repaid, that can be rolled over many times. However, the interest still has to be paid. Does this sound like debt slavery? Yes it does!

The result: You have nothing and will be working for, paying taxes for and basically exist for, private capital.

Thankfully, this is just too outlandish a scenario to materialize. Why I am so sure about that?


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