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Ireland is the latest cautionary tale for the US

November 15, 2010

| MoneyRates.com Senior Financial Analyst, CFA

Ireland went through some nervous moments last week as yields on its debt soared due to concerns over the country's financial solvency. Could this kind of thing happen to the U.S.?

Whether Ireland pulls out of its debt problem with the help of aid from other countries or austerity programs at home, there are some important lessons for the U.S.

The price of debt

A few other countries, most notably Greece, have been down this road already this year. A national dependence on debt escalates to the point where lenders start to doubt the debtor country's ability to repay. That doubt drives the cost of borrowing up -- and thereby tightens the financial squeeze. Foreign aid was able to avert an immediate collapse in Greece, and may be part of the short-term answer in Ireland. The long-term answer is steep government budget cuts to reduce the need for borrowing.

As for whether something similar could happen with U.S. debt, the government may have to come to terms with that possibility. Individual, institutions, and governments have traditionally invested confidently in U.S. bonds. Now though, it isn't just that mounting debt raises questions about the ability to repay. The Federal Reserve's recent quantitative easing program threatens the stability of the currency. If the dollar goes into a steep slide, there would be no logical reason for foreign investors to by dollar-denominated bonds at low yields. Interest rates could skyrocket as a result.

Impact on savings accounts, money market rates, and other deposit rates

If rising interest rates sounds like good news for savings accounts, money market rates, and other deposit rates, think again. If caused in part by a plunging dollar, higher interest rates would probably be accompanied by higher inflation. The result would be no net advantage for interest rates, and a stifled economy to cope with.

The bottom line is that actions of the Federal Reserve and the U.S. government will increasingly be driven by the fact that the U.S. is dependent on foreign lenders. In the end, this may force some unpopular, but necessary, choices.

Your responses to ‘Ireland is the latest cautionary tale for the US’

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Richard Barrington

29 November 2010 at 11:31 am

DD:

I understand your frustration, but in the case of sovereign debt, it's the government rather that the banks that is being bailed out. The leaders certainly let the people down with irresponsible fiscal policy, but over the past decade there hasn't been much political support for fiscal restraint, so there is plenty of blame to go around.

Dyslexia Daisy

29 November 2010 at 7:41 am

The Irish bailout, like the Greece bailout and the looming Portugal bailout, isn't about saving the Irish people, it's about preserving the elite-owned banking system that leeches off them. Soon there'll be a Spanish bailout, perhaps French, German & UK bailouts too - when are people universally going to stand up and say NO to this nonsense?

Hoody

15 November 2010 at 9:55 am

Well right, if interest rates go higher on savings due to inflation, than yes it pretty much comes out as a wash, but there is the deal, a wash is better than being on the street because you had NO SAVINGS to start with. So if I get 15% interest on my CD's and inflation is at 16% or 17% , I'm not all that much better off, but at least I'm still floating.

Right now, with no COLA, and 1% or even less on savings, when everything I need to buy is going up more than that along with higher tax and utilities, I'm not even able to float.

It took me a long time saving my nickle's and dimes to get here, and "paying" my debts on time and off when I could to now find the policies being made are actually hurting me more than helping. I don't mess with stocks, and can't go buying 1400 dollar metal either, even silver at this point. So the rich have no problem with inflation as they hardly notice it anyway on the usual items, and the poor have gov programs.

As a retiree that paid his bills, saved money and lived well below my means to be able to stay away from welfare, I now am slowly being bled out.

I'm sure the stock pushers at CNBC and the gold bugs will differ!! but than they're in a different 7 figure twilight zone as it is.

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