Wednesday, February 24, 2010

Why the U.S. will never be another Greece

Greece is in the headlines recently as the interest rates on Greek government bonds have risen sharply due to their fiscal problems.  Greece is part of the European Union (EU) and the level of Greek sovereign debt as compared to GDP and the annual deficits as compared to GDP are well in excess of EU guidelines for its member countries.  Remember though the currency for Greece is the Euro, meaning Greece can't simply issue more currency to inflate their way out of their fiscal and debt problems.  There is the chance that Greece could default on its debt if it doesn't get some help from stronger European Union members like Germany.

The United States is a different story.  Since the U.S. controls its own currency, there would never be a default on a Treasury bond.  If the U.S. was in dire financial straits similar to Greece, we could (and in our opinion would) simply print more dollars to pay our fixed debt obligations.  The result, reductions in the value of the dollar as compared to other world currencies and gold accompanied by inflation.  This, we believe, is the long-term risk of excess U.S. deficits and growing debt.  For those looking several years down the road, now may be the time to begin hedging against the possibility of such inflation and dollar declines