Confidence is slipping as debt grows...

Last month it was US bonds. Now, this:

S&P cuts long-term outlook for US debt to negative

WASHINGTON – Standard & Poor's Ratings Service downgraded its outlook Monday on U.S. government debt, expressing unprecedented doubts over the ability of Washington to bring the massive federal budget deficits under control.

The agency lowered the long-term outlook to "Negative" from "Stable," saying there is a one in three chance the United States could lose its top investment rating on its debt in the next two years.

S&P said it has little confidence that the White House and Congress will agree on a deficit-reduction plan before the fall 2012 elections and doubts any plan would be in place until after 2014.

The government is on pace to run a record $1.5 trillion deficit this year, the third consecutive deficit exceeding $1 trillion. President Barack Obama and congressional Republicans are sparring over how to reduce the nation's red ink. Their differences over where to cut have put a crucial decision over raising the nation's debt limit in jeopardy.

"We see the path to agreement as challenging because the gap between the parties remains wide," said Standard & Poor's credit analyst Nikola G. Swann.

Stocks plunged after the rating agency lowered its outlook The Dow Jones industrial average fell more than 200 points in afternoon trading.

S&P reaffirmed its investment-grade credit ratings on the U.S. long- and short-term debt itself. But it said the U.S. government is in danger of losing the top ranking if it doesn't come up with a credible plan for reducing its debt. [...]

Time is running out. It never should have been allowed to get this bad.
     

World's biggest bond fund dumps US debt

Pimco's Gross dumps U.S. debt

NEW YORK (CNNMoney) -- Pimco's Total Return Fund (PTTRX), the world's biggest bond fund, slashed its exposure to U.S. government debt to zero last month.

It's the second month in a row that well-known fund manager Bill Gross has drastically reduced Pimco's exposure to U.S. government debt.

Gross has been very vocal about his feelings toward U.S. interest rates, saying in January that they were "robbing" investors and that U.S. government debt should be "exorcized" from investors' portfolios.

The Total Return Fund held about 22% of its holdings in U.S. government debt as recently as December, but reduced those holdings to about 12% in January.

[...]

Gross's comments typically carry considerable influence on investors because his Total Return Fund is by far the world's largest bond fund with more than $240 billion in assets under management. It's also the best-performing bond fund for the last 15 years, according to Morningstar.com.

In his February newsletter, Gross said he believes U.S. Treasuries are trading at a yield of 1.5 percentage points below where they should be historically, making them an unattractive place to invest for the time being. Gross also reiterated that stocks and bonds may struggle this summer when the Federal Reserve ends its second quantitative easing program. [...]

And what affect will this have on people's confidence in US bonds? It's not hard to guess.

There were warnings last year that the Bond Market won't wait much longer for us to get our house in order, to balance our budget. Is that what's coming to pass now?
     

The Bond Market won't wait much longer

A Race Against Time To Balance the Budget

[...] Even as Greece, Spain and Ireland raise the specter of sovereign debt crises, even as France and Britain take bold action to bring their excessive spending under control (at the price of major street violence in their capital cities) American politicians focus on the general unacceptability of a proposal that includes anything that doesn't quite fit their ideological predilections. If they can't have it exactly their way, then they don't want it at all. They are prepared to just coast forward at multi-trillion dollar yearly deficits, leaving only a string of condemnatory press releases in their wake.

But there are Cassandras out there warning against such delays. This spring, Fed Chairman Bernanke warned Congress that the United States could soon face a debt crisis like the one in Greece.

"It's not something that is 10 years away. It affects the markets currently," he told the House Financial Services Committee. "It is possible that bond markets will become worried about the sustainability (of yearly deficits over $1 trillion), and we may find ourselves facing higher interest rates even today."

Just last weekend, the former Fed Chairman Alan Greenspan spoke on NBC's "Meet the Press," saying he believed "something equivalent to what Bowles and Simpson put out is going to be approved by Congress. But the only question is whether it is before or after a crisis in the bond market."

He said the risk is that the deficit, which hit $1.3 trillion this year, could spook the bond market. That would result in long-term interest rates moving up rapidly and could lead to a double-dip recession.

The Fed chairs are not alone. According to Bloomberg News, earlier this year, New York University professor Nouriel Roubini, who predicted that last crash, said that "the U.S. may fall victim to bond "vigilantes" targeting indebted nations from the U.K. to Japan in a potential second stage of the financial crisis."

"The chances are, they are going to wake up in the United States in the next three years and say, 'this is unsustainable.'"

Roubini suggested that "the public debt burden incurred after the 2008 bank panic may now cause the financial crisis to metamorphose.

"There is now a massive re-leveraging of the public sector, with budget deficits on the order of 10 percent" of gross domestic product "in a number of countries," Roubini said. "History would suggest that maybe this crisis is not really over. We just finished the first stage and there's a risk of ending up in the second stage of this financial crisis."

Of course, we may get lucky. But the sad thing is that we don't even have to fully implement a ten-year deficit reduction plan to vastly reduce the risk of a bond crisis. If we were to enact a serious, credible plan -- even if it didn't begin to bite for a few years, that would probably assure the bond market that we are taking care of the problem.

By immediate action, I mean that Congress and the president go into intense negotiations this coming January and keep at it until we have a plan that brings us back to fiscal probity and is reflected in a budget resolution and the early appropriation and authorization bills. It will take about six months of intense, good faith work. [...]

Clearly it can be done, but how much longer are we going to procrastinate? Timing matters. We must keep pressure on the GOP to hold the course on fiscal responsibility, and to do what is necessary. Too little, too late, could have extremely dire consequences. It's fixable, but we have to act NOW.


Also see:

Has US Currency already "collapsed"?

The book "When Money Dies" is back in print

What happens when Tax Cuts Expire in 2011?

Our true national debt: $130,000,000,000,000.

Argentina's Example: Are we heading there?