Types of Risks

Governmental agencies project that the United States will continue to increase its already high debt levels for the foreseeable future. Doing so creates unsystematic and systematic risks. Yet, it is not clear the U.S. Government has a Risk Management Process (the systematic process of identifying, analyzing and responding to this risk) to address these growing risks. Or a process to avoid, mitigate or transfer these risks. They appear only willing to accept the risks, regardless of the consequence.

President Trump states in his 2021 Budget:

“Such high and rising debt will have serious negative consequences for the budget and the Nation. It slows economic growth, as the costs of financing the debt crowds out more productive investments and could eventually limit the Federal Government’s ability to respond to urgent national security needs, invest in key priorities such as infrastructure, and enact other pro-growth policies. In fact, by 2021, the United States will be spending more money on paying for the debt than for the budgets of the Departments of Veterans Affairs, Justice, Homeland Security, and the National Aeronautics and Space Administration combined. Federal borrowing also competes for funds in the Nation’s capital markets, threatening higher interest rates, and crowding out new investment by the private sector that could create jobs and raise wages. If America’s spending and debt crisis are not addressed and lower economic growth continues, American families will see a much lower standard of living. Higher interest rates would make it harder for families to buy homes, finance car payments, or pay for college. Fewer education and training opportunities stemming from lower investment would leave workers without the skills to keep up with the demands of a more technology-based, global economy. In addition, continued growth of debt and deficits will constrain American families’ ability to improve their lives and the lives of their children by claiming a larger share of family income for taxes. It is the children and grandchildren of today’s taxpayers who will bear the burden for this recklessness.”

Risks include but are not limited to:

Timing – No one knows the timing of a crisis despite President Trump statement: “It is the children and grandchildren of today’s taxpayers who will bear the burden for this recklessness.”

Interest Rate – a sudden increase in interest rates due to real or perceived fears of U.S Treasuries could reduce the market value of outstanding government bonds, inflicting losses on investors who hold them. That decline could precipitate a broader financial crisis by causing losses for mutual funds, pension funds, insurance companies, banks, and other holders of federal debt—losses that might be large enough to cause some financial institutions to fail.

Liquidity / Market pressure on funding needs – can increase market pressures to meet government funding needs, which can drive debt costs higher and cause more debt to be sold, thereby increasing refinancing risk.

Payments when due – also raises concerns that the government will not be able to make principal or interest payments when they are due.  The U.S. Government already had one technical default due to not raising the debt limit on time.

Decline in currency  – unsustainable debt levels can decline the valuation of currencies,

Counter cyclical fiscal policy – can prevent the government from implementing effective counter-cyclical fiscal policy in economic downturns.

Credit / Rating Agencies Downgrade – The market prices and yields of securities supported by the full faith and credit of the U.S. Government may be adversely affected by rating agencies’ downgrade of the long-term sovereign credit rating of the United States. Similar downgrades in the future could increase volatility in domestic and foreign financial markets, result in higher interest rates, lower prices of U.S. Treasury securities and increase the costs of different kinds of debt.

Default  – Although the risk of default of U.S. government securities is considered low, any default on the part of a portfolio investment could cause a Fund’s share price or yield to fall.  The risk of default can be heightened when there is uncertainty relating to negotiations in the U.S. Congress over increasing the statutory debt ceiling. If the U.S. Congress is unable to negotiate an increase to the statutory debt ceiling, the U.S. government can default on certain U.S. government securities including those held by a Fund, which could have an adverse impact on the Fund.

Recession – the chance that a period of economic contraction will result in losses to an investment, business or individual.

Volatility – how much prices of an asset or investment tend to change.

Economic  – the chance that global or regional conditions will impact a business

Existential – the potential for an event or process that results in significant reductions in quality of life on a global basis.

Operational  –  the apparent lack of a risk model or discipline to reach a consensus as to how much is too much debt outstanding.