Ask Money

Trust the government’s "full faith and credit"

Chris Farrell May 11, 2011

Question: As a US Government employee I have been buying US Savings Bonds at work for years. If the Congress does not raise the debt limit what will happen to my Series EE bonds that are “backed by the full faith and credit of the US Government”? Should I start cashing them in now before they reach maturity? Tom, Gaithersburg, MD

Answer: Assuming you don’t need the money right away I would hold on to your savings bonds.

That said, it’s a disgrace that Washington is even talking about the prospect of defaulting on the federal debt. It’s bad enough to even flirt with the idea.

On Monday, Treasury Secretary Timothy Geithner informed Congress that the federal government will hit the debt limit ceiling in two weeks. The Treasury won’t be able to borrow additional funds. The don’t-raise-the-debt-limit crowd are needlessly risking calamity and if the U.S. government did default it would be a global economic catastrophe.

For instance, Treasury bills, notes, and bonds have long been considered the world’s default-free security. That’s why Treasuries are the foundation of retiree investment portfolio. The same goes for investors, banks, insurance companies, and so on. The grandstranders threatening to default are fiscally irresponsible. I agree with Bruce Bartlett, a former Reagan policy advisor and Treasury official under President George H.W. Bush, in his latest Fiscal Times column:

It’s reckless because failure to raise the debt limit not only threatens a default that could potentially roil the entire world financial system, but would potentially deprive federal workers of their salaries, deny payments to businesses for goods and services sold to the federal government, renege on Social Security benefits to retirees, and shortchange savers who depend on interest income.

So, why would I hold on to the savings bonds? Odds are that sanity will prevail, hopefully soon. That’s what global investors are betting on since the interest rates on U.S. Treasuries remain remarkably low. Global investors believe the U.S. political system will rise to the occasion.

Yet even if the unthinkable came to pass the U.S. government would eventually make good on its debts, including accrued interest.

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