Wiedemer: US Treasurys Now a ‘Toxic Asset,’ Debt Deal Won’t Fix It

Wiedemer: US Treasurys Now a ‘Toxic Asset,’ Debt Deal Won’t Fix It
Saturday, 30 Jul 2011 04:13 PM
By Forrest Jones and Ashley Martella

The United States may lose its AAA rating by defaulting on its debt and it will be very hard to get that rating back, says Robert Wiedemer, financial commentator and best-selling author of "Aftershock."

Lawmakers are at an impasse on agreeing on terms to lift the government's $14.3 trillion debt ceiling and avoid an Aug. 2 default.

Republicans and Democrats want to lift the ceiling but disagree on how to reduce the deficit in exchange for lifting the White House's borrowing limit.

They will probably strike a deal and lift the ceiling, Wiedemer says, but they may not do it in time, and credit ratings agencies may strip the country of its AAA ratings.

You don't get those back that easily, says Wiedemer, managing director of Absolute Investment Manager.

"I don't think we are going to work our way back to AAA," Wiedemer tells Newsmax.TV.

"Any downgrade I think is ultimately going to be based more on fundamental issues. We have a huge debt now almost eight times our tax revenues. That's massive. It's fundamentally a toxic asset."

A downgrade won't mean the end of the world for the financial system, says Wiedemer, who recently released an updated edition of his best-selling book, "Aftershock."

Economists at the ratings agencies themselves have said that much.

But Americans will feel the pinch when investors demand higher interest rates in U.S. debt auctions, which will trickle down to loans like mortgages and student loans.

"Any kind of nick does do long-term harm to our credibility, but is the immediate impact catastrophic? No, of course not. But is the long-term blow to our reputation a problem especially if our economy sees more inflation and other problems? It just piles on," Wiedemer says.

"If it was the only problem, I wouldn't worry about it. But it's indicative of a much larger problem."

After default, the United States enjoys the unique position in that the Federal Reserve can print money and buy U.S. Treasurys to keep them as affordable for the government as possible.

The problem with such a move is that it would threaten to pump up inflation rates even if it does prevent ratings from falling too far below AAA.

"If we have any real trouble selling our bonds, Ben [Bernanke] will just step in and buy them with printed money. And there's really no limit to that other than when he does that, that's going to create inflation."

"But in the short term, that limits the amount of downgrades you can get. The longer-term problem is more insidious, and that's inflation."

China to Take a Hit

Political parties may suffer fresh beatings in popularity polls after the debt-ceiling impasse, and those that elected them will suffer as well in the form of a sluggish economy threatened by high debt levels and rising inflation rates.

The Chinese, meanwhile, may also take it across the chin if default occurs.

China has invested heavily in U.S. debt but has also manipulated its currency in such a way that it has gained an edge in global trade.

A weak Chinese yuan makes its exports more competitive.

But a disruption in global markets stemming from a U.S. default could mess up Beijing's plans.

"Anybody who invests in something that defaults, they get hit and they take a big loss. I think the Chinese could be in for a really big hit by betting so heavily on manipulating the dollar. It's not a smart bet, fundamentally, to manipulate foreign exchange," Wiedemer says.

"That's why few countries do it. Certainly our largest trading partner Canada doesn't do it. I think it's a dumb bet, and I think they are going to lose heavily on it."

Standard and Poor's, meanwhile, says it would like to see the country shave $4 trillion off of its deficits over the long term. "$4 trillion would be a good down payment," says John Chambers, chairman of the company’s sovereign rating committee, according to Bloomberg.

"A grand bargain of that nature would signal the seriousness of policy makers to address the fiscal situation in the U.S."