Toxic Assets

Toxic AssetsToxic assets has become a popular term for certain types financial assets whose value has fallen significantly and for which there is no longer a functioning market, so that such assets cannot be sold at a price satisfactory to the possessor of those assets which leaves those possessors in a very bad position since they’re holding assets that often cannot be sold except at a significant loss.

To-date this term has mostly been used to describe a subset of securities that were based upon mortgage-based derivatives. I wonder though if people should start thinking of America’s debt in similar terms, at least in the longer term.

USA Economy - Money To Burn

The US government, especially the bloated federal government, is and has been living well beyond its means. Expenditures consistently outpace revenues and it’s reached the point where the government and the pundits are all claiming that, if we don’t borrow more money we’ll default on the debt that we already have. Hence, the brouhaha over the current debt ceiling argument in Congress.

In the near-term it would be ridiculously hyperbolic to describe the American government’s debt as a toxic asset but that doesn’t mean that it should objectively be considered a sinecure for investment either. Moody’s, Standard & Poor, and the International Monetary Fund would be right to downgrade US Treasury Bonds and all US Denomination backed debt. A continued AAA credit rating is unwarranted given the ongoing fiscal irresponsibility of America’s government.

However, if the American government doesn’t rediscover fiscal responsibility it’s debt may well in the years to come be classed as a toxic asset. That’s happened to plenty of other nations through the course of even recent history.

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4 Responses to “Toxic Assets”

  1. Alan Scott Says:

    The same ratings agencies who are giving us a AAA rating were the ones who rated collateralized debt obligations that sunk the US economy. We probably should be down graded to junk bond status. As long as Reid controls the Senate and Obama the White House we are a poor credit risk.

  2. jonolan Says:

    Very true, Alan. Yet let us not forget that President Bush Jr. and the Congresses her dealt with were little or no better in this regard.

    I can put aside the fact that we didn’t have a levy to help defray the costs of Afghanistan and Iraq, a war tax being political suicide. I can’t ignore that they didn’t make any effort to curb spending either.

    Frankly, this problem goes back many decades; it’s just reaching the breaking point now.

  3. Bill Kruse Says:

    What I find most concerning is the speed and willingness with which S&P moved to downgrade the States compared to the way they looked the other way for years leading up to and during the credit crunch. It suggests they were on one agenda then and a different one now – but what? Is this evidence of the ‘banker wars’ rumours that are doing the rounds?

  4. jonolan Says:

    Well, that didn’t take long.

    I think, Bill, that you’ll find that financial firms adapt to changing situations. While they carried the US government for years, the recent sharp rise in borrowing combined with the loss of revenue has made them finally do what they should have done before.

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