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What You Can Do to Protect Yourself Against Unnecessary U.S. Government Default

By Robert Engle

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If you thought it was hard to get an iPhone 5s, try getting access to your money when everyone else is trying to make their transfers.

If Congress and the White House fail to raise the debt ceiling this week and the United States defaults on its debt, what can we expect and how can we protect ourselves against these events?

First of all, we might look at our savings and retirement funds to see if we own Treasury securities. If so, Treasuries will stop paying interest and decline in value, so it would make sense to sell them and replace them with AAA-rated corporate bonds.

Next we should look at our cash holdings, which probably are in some form of money market fund. This fund is likely to be heavily invested in U.S. Treasury bills and other U.S.-guaranteed agency debt. With a default, money market funds may not be able to pay redemptions and will be forced to “break the buck,” meaning their net asset value will fall below $1. The first investors out of these funds will be repaid in full, but later exits will not. So now is the time to move these funds into your banks’ checking accounts. If you thought it was hard to get an iPhone 5s, try getting access to your money when everyone else is trying to make their transfers.

Read full article as published by The Institute for New Economic Thinking

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Robert Engle is the Michael Armellino Professor of Management and Financial Services and the Director of The Volatility Institute.