Protecting Your 401k From a Government Default

There seems to be some hope of a solution as Congressman Ron Paul Says `No Doubt' debt ceiling will Be raised. He was interviewed on Bloomberg late Thursday 7-28-2011.

Also Roger Altman, a former Treasury Assitant Secretary did not feel we would have a Treasury default. He was interviewed on Bloomberg on 7-29-11.

David Rosenberg of Gluskin, Sheff said today he feels that the Treasury won’t default and that the crisis could be cathartic resulting in steps being taken to make the nation’s finances better.

My opinion regarding an extreme case of potential default is that if the government refused to pay vendors it could keep other services running such as transfer payments, salaries, pensions and of course debt service. So it could take several months before vendors get assertive and cutoff their big customer because they did not get paid.

Also there will be a new period of austerity either due to higher taxes or less government spending, resulting in a dramatic reduction in purchasing power and liquidity for the general public and this will usher in an era of Japan-style Soft depression which means the only game in town will be to buy long term Treasuries. So I expect them to go up and most other assets to go down.

The chart action today for the U.S. Treasury 10 year yield was great, it made dramatic lows down to 2.805%, which implies that in a few days Congress and the president will reach agreement to solve the problem. The invisible hand of the market would not have let rates go down so much today if the Treasury bond was going to become a bad investment.

Where is a safe haven for investors if the Treasury bonds default?

63% of the world’s AAA debt securities are U.S. Treasuries. They will still be quite good quality Bills, Notes, and bonds even if a business that calls itself a "ratings agency” claims to have detected a need to re-rate them a notch lower. Where were the agencies when they rated bad mortgages as AAA? Why should we trust them now after all the mistakes they made? Once the debt ceiling is lifted then the Fed can provide unlimited liquidity for Treasuries and they will be safe from default.

By contrast, the Eurozone and Japan have worse problems. And if American consumers reduce spending then Asian countries may suffer, which may threaten their currencies. A deflation may make gold and commodities go down.

About the author

Don Martin, CFP®

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  • I am planning to leave my job sometime soon. Should I be worried to loose more money(401k). Should I leave sooner just to pull the money and still would also have to pay the penalty, but at least I would leave with something instead of nothing ?

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