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10 Reasons Why The Market-Correction Triggered Money Flow Into Dollar Denominated Bonds Is The Wrong Move

Many people think of any type of dollar denominated bonds, whether they are U.S. corporate bonds or U.S. Treasury bonds as a safe place to park your money for reliable sources of income stream. In fact, the U.S. Treasury Department on their own website, even tout U.S. Treasury Securities as a great way to invest and save for the future.

Many people believe this nonsense because they are advised of this by a horde of financial consultants that have zero understanding of how the political-corporate-banking triumvirate operates, and how this financial triumvirate has produced a most unattractive likely scenario for dollar-denominated bonds going forward from 2007. Many people think of U.S. Treasury bonds as safe because of the federal guarantee. The ten reasons below render that federal guarantee irrelevant.

And dont think this doesnt affect you just because you arent American. Non-Americans aggregately hold a lot more U.S. dollars in this world than Americans do. If you are one of those misled people, American or non-American, reading the below ten reasons can save you a lot of grief in the future.

(1)The often repeated financial consultant statement that bonds are a safe place to park your money, especially if you are older, is a myth.

Who cares if you earn a 5% revenue stream from bonds if the currency they are denominated in loses 15% in value over that same time span? Think of the losses of the U.S. dollar versus other major global currencies in 2006. An 11% decline against the Euro; An 11% decline against the New Zealand dollar; A whopping 14% decline versus the Pound Sterling; and a incredulous 15% against the Thai Baht ( I mention the New Zealand dollar and Thai baht because these currencies are commonly held currencies in Asian currency baskets offered by major banks as a hedge against the falling dollar). If you hold dollar denominated bonds with a 5% income stream and your dollars just lost 15% of purchasing power, are you really happy with a net 10% loss?

(2)Many of those in the retirement phase of their lives are convinced to invest in longer maturity bonds because of poorer yields of short-term bonds. This strategy comes with risk because of the following.

As the Euro gradually replaces the U.S. dollar as the international currency of choice, the longer maturity necessary to ensure a return of face value on bonds presents a significantly greater risk.

(3)As interest rates go up, the face value of bonds go down. Although Wall Street strongly expects the U.S. Federal Reserve to cut interest rates soon to stimulate a faltering U.S. economy, this is how I see it.

At some point and time, the U.S. Federal Reserve will try to block global flight from the U.S. dollar by propping up interest rates, not cutting them. Here you suffer twice. Once from a loss of purchasing power and twice, from a devaluation of the face value. See number (2) why holding a long term bond until maturity may not be an option. And even if the Federal Reserve keeps in line with Wall Street expectations, thats bad news too. Even if interest rates stay flat or go down, then the dollars that your bonds are denominated in lose value. This is pretty much a lose-lose situation and not one that I want any part of.

(4)As the dollar loses value over time, banks and other financial institutions will increase interest rates on loans and other financial instruments to compensate for the heavy losses they are incurring on a weakening dollar.

As your costs of doing business and living rise, yields from bonds wont cut it anymore. In addition to the three strikes listed above, this is strike four. Need more reasons? Then continue reading.

(5)As the massive yen carry trade continues to unwind, and the Bank of Japan takes increasing measures to strengthen the Yen as the Japanese economy continues emerging from its recession, the strengthening of the Japanese Yen in addition to the Pound Sterling and Euro will threaten dollar supremacy.

Last year as every single major world currency pounded the dollar, the Yen was just about flat against the dollar. In the coming year to eighteen months, it will be the Yens turn to pound the dollar.

(6)While most people think that there has been no further attack on the U.S. by terrorists since 9/11, there has been a far more devastating ongoing attack – an ongoing economic war.

Though this fact is not discussed at all in the mainstream media, Osama bin Ladens has repeatedly stated that his number one goal to topple the U.S. as an economic power. The attacks on the Twin Towers were symbolic of that goal. However, if he achieves his goal of debilitating the U.S. economy through the draining of U.S. resources in the current prolonged Iraqi war, this would make him far happier than any overt attack he could accomplish.

(7)In response to (6), the U.S. Federal Reserve has expanded the dollar money supply to provide funding for the war.

With no end in sight to this war, we can expect the dollar money supply to continue to expand, therefore placing more downward pressure on the dollar. No matter that U.S. Secretary of Treasury Hank Paulson publicly declared that the U.S. economy is strong and in good shape in March of 2007. This simply is not true.

(8)The U.S. has no powerful allies to keep the dollar strong.

Don’t underestimate the importance of the above statement. With protectionism sentiment growing stronger among the newly elected Democratic U.S. Congress, the U.S. certainly has no friends in China, the largest holder of dollar denominated debt at over $1 trillion. Certainly when the U.S. Congress moved to block the Chinese state-sponsored bid for U.S. oil giant Unocal because they viewed such an acquisition as a threat to national security, the Chinese government certainly viewed this action as hostile to their business interests. Certainly, this incident will remain fresh in the minds of Chinese government officials when U.S. Secretary of Treasury Hank Paulson or U.S. Federal Reserve Chairman Ben Bernank make continued please to the Chinese government for assistance.

(9)The largest holders of Petrodollar reserves include Russia, Venezuela, Iran and other Middle Eastern countries.

Read that list again. There is not a single nation strongly friendly to the U.S. on that list.

(10)When people finally realize that (1) through (9) are not only true, but inevitable, there may be a flight from the bond market, causing bond prices to tumble.

When you realize the shakiness of your situation as a dollar-denominated bond holder, think about this? Dont you think foreign governments and wealthy private institutions and individuals, holders of dollar-denominated assets in massively greater quantities, realize the same? When they realize the facts that Ive laid out above, their aggregate actions will reflect poorly upon dollar denominated bonds as well.

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Debt is a financial burden when not repaid in time. Debt is also an essential part of fueling future financial growth. When debt starts accumulating and it becomes difficult for the person or corporation to re-pay their loans (the principal as well as interest), the time is right for the debt help team to walk in and help those in need.

There are specialized financial consultants who will assess the types o loans that you have taken and how best you can repay them. When it comes to helping you with the debts, a good debt help team will ensure that the debt is mapped out before they can proceed further. At times people have taken a number of small loans, the cumulative of which can be a huge sum.

Think in terms of 15 $100 loans, cumulative sum is $1500. This can be in terms of small payday loans, loans from the local pawnbroker or even cash withdrawals on various credit cards. Lets just say that 10% flat is the interest rate, this means that there is an outflow of $1650 ($1500 + $150 for interest charges. Thus in these situations one would need the help of a team which can help to make repayment of debts easier by working around the repayment options, the tenure of the loan and the interest rates.

Don’t be fooled, when the debt help teams say that they can lessen your loans or make your credit report better. Credit reports can only be better when there is repayment of loan and credit that you have taken. This should also be reported to the credit bureaus for them to update their records. You can also ask for your credit report as well as report any discrepancies. This is all free of cost, generally needing only to submit an email address.

Debt help is a wise strategy. Although these services will cost you money, the final outcome will see you less out of pocket than going it alone.

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