Due to the stubborn inflation figures, the Fed responded with an aggressive rate hike campaign to cool off the economy. Some experts believe that this battle against inflation with rate hikes could lead to a financial crisis due to a variety of factors.
Treasury bills have historically been considered a safe investment, with investors turning to conservative options for their money through short-term government securities. However, there appears to be concern over the impact of the government’s debt on T-bills. Here, we will look at the idea of safe assets if Wall Street heads into crisis due to the scary math behind the debt levels.
The Scary Math Behind Safe Assets
A recent story published in the Wall Street Journal shared the scary math behind the world’s safest assets, T-bills. While these assets have been a reliable investment during times of crisis, the government’s debt from the war in Ukraine, the pandemic, and the global financial crisis has reached record levels.
The article went on to explain possible scenarios that could occur, with the worst case being the federal debt adding another $3.5 trillion by the end of 2023. This would mean that the annual interest bill for the government would be $2 trillion. For what it’s worth, individual income taxes will bring in $2.5 trillion in 2023.
The Congressional Budget Office also said the public U.S. debt will surpass the gross domestic product this fiscal year. One major issue that experts have pointed out is that when debt contributes to a significant share of a country’s economy, the situation can accelerate quickly.
What Are Safe Assets?
When investing your money, safe assets will provide you with a reliable return, but they won’t provide some of the exceptional returns that can be seen when an individual stock takes off.
“The game of investing is risk vs. reward,” remarked True Tamplin, a Certified Educator in Personal Finance (CEPF) and founder of FinanceStrategists.com. “During times of crisis, it might be worth dropping your risk while also dropping your reward with safe investments like U.S. Treasury Notes. Remember, market timers have historically underperformed compared to those who rode out the storm.”
Here are a couple other options to consider when trying to invest your money during times of crisis.
Leave Your Money in Savings
Ray Dalio, founder of Bridgewater Associates, one of the world’s largest hedge funds, is known for stating that cash is trash. However, Dalio has changed his stance in recent times, as he was quoted in a CNBC interview as saying, “Cash used to be trashy. Cash is pretty attractive now. It’s attractive in relation to bonds. It’s actually attractive in relation to stocks.”
If you’re concerned about what to do with your money right now, you could leave it in a savings account. With many banks and financial institutions offering attractive savings accounts with 5% interest, this would be a good time to leave your money in a safe investment vehicle as you wait to figure out what’s next. You don’t always have to be investing aggressively, and there’s nothing wrong with leaving your money in a safe place for now.
Invest in Your Education
During challenging times, you could take the time to return to school, upgrade your skills, or find ways to invest in yourself. While it makes sense to find the highest return on your savings, sometimes you have to prioritize increasing your income so that you have more money coming in.
How To Beat Inflation
With inflation increasing the prices of everything in the economy, your purchasing power is dropping. As a result of this, investors are looking for ways to beat the rate of inflation with their savings so that their money isn’t technically losing value while sitting in the bank. We spoke with Thomas Diem, CFP and ChFC from Diem Wealth Management, about the role of inflation in investing right now.
“Inflation has been moderating in the last year to under 4% as of this writing and the rate of inflation should be our bogey to meet or beat,” remarked Diem. “One could start with the safest instrument, Treasury bills, and get above 5%. That’s about a point above inflation. The challenge with Treasury bills is their short maturity. When the bill matures in under one year, one may look at significantly lower rates for their safe investment replacement.”
So, even though there are concerns over the government’s debt, many are still investing in this instrument..
“The trick with these instruments is to understand how safe the protection is,” warned Diem when discussing these safe assets. “A qualified advisor should be able to help you wade through the alphabet soup of ratings and make great choices for your money that has to be safe.”
While the reality is that sometimes you have to take calculated risks if you want to grow your net worth, you have to consider the possibility of losing your hard-earned money if luck isn’t on your side. This is why many investors turn to safe assets like T-bills during challenging times.
We will continue to monitor the situation and the impact of the government’s debt on this safe asset and keep you posted.
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