Fear not, your bonds are safe
It's no wonder consumer confidence is so low. Yes, jobs are becoming harder to find as some businesses grow concerned about a weaker economy and hold off on hiring. In addition, many people are stuck with homes they can't afford and harsher terms...
It's no wonder consumer confidence is so low.
Yes, jobs are becoming harder to find as some businesses grow concerned about a weaker economy and hold off on hiring. In addition, many people are stuck with homes they can't afford and harsher terms on credit cards. None of these conditions is good for a slowing economy, and they could lead to more job losses and perhaps a deeper recession than some experts envision.
But perhaps the glum mood that showed up in the consumer confidence numbers last week had more to do with televised angst over the downfall of investment banking firm Bear Stearns and the concerns it conjured up in Americans.
Worried people like 79-year-old Margaret Verzilli have been sending me e-mails. She asked: "The financial situation of the country being what it is, I am very fearful that if the country goes bankrupt, my EE bonds will be worthless. Should I begin to redeem them or hold on?"
To Verzilli and others like her, I offer this advice from economists: Don't worry about the U.S. government repaying you for your savings bonds or Treasury bonds.
It's not that the government hasn't been borrowing freely or taking on some of the risk behind the mortgage-related missteps Wall Street committed.
But while individuals can go bankrupt, "there is no risk the government won't pay its bills," said Anil Kashyap, a University of Chicago Graduate School of Business finance professor who has written extensively about the current financial situation. "The United States is nowhere near a crisis situation."
And even if it had trouble paying bills, it would have a simple way out: "If need be, the government will raise taxes to pay its bills," Kashyap said.
The options don't stop there. The government also can cut spending. That could make some constituents angry, but it's a political concern rather than a matter of whether the government collapses in bankruptcy, Kashyap said.
Countries that have encountered serious financial problems have borrowed heavily abroad, paid high interest rates to attract borrowers, and been unwilling to make cuts in spending, said Raghuram Rajan, a former International Monetary Fund economist who is now a finance professor at the University of Chicago. The U.S. government's debt is about65 percent of gross domestic product), Rajan said, "which is relatively small." During World War II, Rajan said, it was more than 100 percent.
Gail MarksJarvis is a personal finance columnist for the Chicago Tribune.