Politics, the Treasury and Risk

Wouldn’t the increased interest rates demanded by the markets make it more expensive to sell Treasury debt? You bet. Wouldn’t that require an increase in taxes to pay off more costly debt? The plain truth is, if politicians want to lower taxes, threatening to default on America’s obligations by allowing the country to hit the debt ceiling—or threatening to—is not the way to accomplish that. It can only hurt the country by eroding confidence and raising the risk of investing in U.S. Treasury debt—thereby increasing costs, not decreasing them.

Mitigating Risk

These are, of course, not the only risks investors face, and veteran analyst and investor A. Michael Lipper treats us to his thinking on several types of risk for equities investors in his recent blog post, “Identify Your Strategic Risk Points.” He is president of Lipper Advisory Services, Inc. and created the Lipper Indexes and Averages for mutual funds. He is the author of “MONEY WISE: How to Create, Grow and Preserve Your Wealth" (2008, St. Martin's Press).  

Lipper notes some of the lessons investors can learn from considering the momentum, value and sports handicapping approaches to investing and that a balanced approach to growth versus value—and not traveling with the institutional herd—may be a better way to mitigate some of the risks inherent in each.

This reasoning made me wonder if a more moderate approach to cutting the deficit and taxes might be possible in Washington. Certainly, if one thinks that the best way to invest is to prudently diversify the risk across asset classes and styles, with the goal of reducing risk while at the same time boosting returns, perhaps a more moderate, less partisan Congress could find a way to cut the deficit and taxes in a more diverse and moderate fashion and over a longer period of time, mitigating the risks to the fragile U.S. and global economy. Preserving the credit rating of the United States is not to be taken lightly; the wellbeing of Americans depends on it.