Hi Folks,

Any students of history who want to take a stab at this one?: Scenario includes what Koskinen calls, "economic dislocations", but not TEOTWAWKI.

(I've already bought my rice and beans and moved to a rural community where others have done the same). Most of my money is going to be tied up in a small debt free house. I've got a couple of nickels left. I already have some gold, the rest is in cash (I got out of stocks about 2 months ago). Now I've got to make a decision about the IRA money I took out of stocks. If I do nothing and leave it in Cash - I'll have to pay the penalties and loose a pretty big chunk of it. What about rolling my former IRA money into T-bills or US long bonds? Here is how my net worth would be allocated:
house: 50%
Cash on hand: 10%
Gold on hand: 10%
U.S. Treasuries: 10%
Cash in Bank: 10%
Commodities: 10%
  (Rice, Beans, garden seeds, tools, weapons, barter items)

When the stock market failed, and during the subsequent bank closures of the great depression, how did people fare who owned US Gov, debt?

Thanks for taking the time to answer.   Berry

-- Berry Picker (BerryPicking@yahoo.com), September 01, 1999

Answers

If you took you money out of the IRA you can't put it back, you are stuck for taxes (if due) and penalties. If you are just talking about transfering it to another type of IRA and did not take delivery of a check, your O.K. Don't know about depression bond performance. I was tempted to go that way, bought goldmine stocks instead. (Not all mines are equal - visit Kitco discussion forum.)

-- rambo (rambo@thewoods.com), September 01, 1999.

Don't buy bonds now. If the interest rates continue to go up you will lose money big time. Also the risk of default because of a sudden slowdown in the economy is very large (IMHO). This would also add to the upward pressure on bond rates. Its a real mess out there.

Cash in hand and precious metals, no debt, skills and supplies. Wait until the air is clear before you reinvest that money. Also you may wish to purchase a good book on bonds which talks about all the gory details and how the game is played so that you can educate yourself during the interim.

That said, if we have a spike in interest rates lasting into next year and it looks like the economy has tanked then bonds may be an attractive option. They should be very high, the banks which are left standing will have proven their ability to do business, money would become a valuable and inevitably interest rates would slowly fall. In such an environment it would be prudent to buy bonds at say 15 to 25% and to wait for a few years to sell them at say 10% for a 50 to 150% profit.

In a depression the government will be trying to give money away at about 0.5 to 0.1% rate per annum. This is happening in Japan right now. Comparatively the Japanese Government Bond (JGB) was yielding 7% at the height of their market bubble. A current holder of the 1989 issue bond could sell today and realize over 1000% profit. That is the kind of situation you are looking for. It doesn't come very often but when it does you need to recognize it and play it right.

-- ..- (dit@dot.dash), September 01, 1999.

Berry,

dit dot had it mostly right. If interest rates go up, and I would expect them to do so up until rollover and perhaps beyond depending upon the inflation rate, then buying bonds is a losing proposition.

A direct answer to your question would be that there weren't many government bonds back before the Great Depression because the Federal government really wasn't that large. For the people who held them, however, they probably provided a nice return since the Depression ushered in a period of deflation. This raises the real rate of return for those holding bonds.

By contrast in the 70s when we had stagflation, lenders got hosed by the inflation which meant that they got paid back with cheaper dollars than the ones they lent out. For a period of 3 years at least, the real interest rate was actually negative.

Personally, I think that there will not be any deflation until well into 2000. I expect to see bad stagflation, even worse than we saw in the 70s. I think you're in good shape financially. I would use your IRA to buy more preps or more gold, or possibly cash.

-- nothere nothere (notherethere@hotmail.com), September 01, 1999.

Thanks dit-dot. I was thinking more of asset preservation than speculation about trading. Example: If I buy a $1,000 6 month T-bill that's paying 4% interest, then at the end of 6 months I get my $1,000 back in addition to the interest I earned during the six months, yes?

I've been assuming that the bond "market" only matters if I sell before maturity? This would be 10% of my net worth that I don't need to be liquid.

Berry

-- Berry Picker (BerryPicking@yahoo.com), September 01, 1999.

Berry, Look into the 10 year inflation adjusted T-bill with another auction scheduled for October. You will not get less than your investment back if the government holds. If we have runaway inflation, the bond is set for that. Further, if the government holds, it won't default although it might roll the bonds over to 30- year. Anyway, you should be able to sell them at some point before that. If the government doesn't hold, forget capital, anyway.

-- Mara Wayne (MaraWayne@aol.com), September 01, 1999.

Berry,

The problem that dit dot mentioned regarding bond interest rates does not apply to the short term T bills. On the other hand, I do not know how to "roll" you IRA into T bills without the IRA early withdrawal penalty .

Jerry

-- Jerry B (skeptic76@erols.com), September 01, 1999.

if the market crashes then the government is going to have to borrow more money to finance its spending. However, the government and the american people are already up to their eye balls in debt. The time may come, like in Russia, where no interest rate will attract enough buyers. i think that the likelyhood of the dabt being monitized is high.

put your ira into commodity mutual fund or into to gold stocks. unless you think the govt will take care of you

-- Guns, Grub & Gold (home@the city.com), September 01, 1999.

I don't know what fedgov instruments were available in the 'thirties.

A couple of things to consider, though.

Gold producers, there are good reasons to own them but I see them having the same y2k risk as any other industry. Holding physical gold should be safer and you are doing that.

Harry Browne suggested years ago, IIRC, that for capital preservation a portfolio of equal dollar amounts of Long Bonds (30 year), T Bills (52 week) and physical gold would be stable in the event of deflation or inflation or flat landing.

If we have a flat landing, each element remains stable. Inflation, the gold appreciates and the bonds decline, offsetting each other. Deflation, the bonds appreciate, the gold declines, another offset.

At the end of each year, each element is either sold / purchaced to bring the portfolio back to equal dollar amounts.

As long as the sum of the elements remains stable you have preserved assets without having to be able to predict future market direction.

-- Tom Beckner (xouttbeckner@erols.com), September 01, 1999.

If the IRA is at a bank or brokerage firm, you could buy Treasuries in the account without withdrawal penalties. If the IRA is at a mutual fund, you should check on whether the fund family has a short- term US Treasury fund option.

The issue of how bonds would fair in a Depression is a bit more difficult. The Thirties was a deflationary depression and bonds generally rose in value. However, there was one point where short- term debt instruments had a negative yield. For example, a TBill for $10,000 might cost, say $10,300. The theory being that return of capital was worth a negative yield.

The 1970's saw an inflationary depression, where bonds actually went down more than stocks. Short-term instruments earned interest until redemption, but if you bought a 10-year bond the value dropped dramatically unless you held to maturity. Even if you held to maturity and locked in a rate, you would have lost a good deal through inflation.

If you have no clear opinion regarding deflation vs inflation, your best bet would be to buy short-term maturities and be happy if you get your capital back. I have huge respect for Greenspan, and am betting he will make sure the Fed returns your investment under the most severe of circumstances. I think he will do what needs to be done in the event of a panic. He saved our financial structure when the brokerage firms were bankrupt on 10/19/87 and I expect that he has a contingency plan for Y2K.

One other thought-I believe Treasuries require a minimum purchase of $10,000, unless you own them through a fund (which would not be my preference).

-- mike (maples@voy.net), September 01, 1999.

Call it a hunch. I suspect that the better historic indicator would be how British government bonds fared during the Great Depression.

It is a pet theory of mine that the USA in 1999 is far more analogous to the British Empire of 1929 than to the USA of 1929. Conversely, the Russians in 1999 are playing the role of the Weimar Republic of Germany in 1929. These analogies can be overdrawn, but these two strike me as pretty close to the bone. When Hindenberg - er, I mean Yeltsin steps off the stage, take a good long look at who replaces him.

-- Brian McLaughlin (brianm@ims.com), September 01, 1999.

Another thought....

I can't be sure from your post whether you have already distributed the money out of your IRA or are about to do so. If you've taken it out, I believe you can put it back in, without penalty, within 60 days of withdrawal. You could then buy Treasuries inside your IRA.

-- mike (maples@voy.net), September 01, 1999.

i would put my money into 1 year T-bills. you can buy them yorself directly from the govmt .www.treasurydirect.gov. We will have probably another.25 increase in the interest rate by the next October. the one yr. tBills are auctioned once a month 9/17 etc. you may want to do some staggering and perhaps do some 26 weeks, leeser interest rate. if you decide to buy do a noncopetitve bid because you are not a broker. you can probably get 5.00to 5.25% on a one year now. You want to preserve your capital. This is the SAFEST INVESTment you can make. If the govm't goes do not worry about anything-the banks will go before the gv;mt and we have some major problems You can probably roll them over to an IRA but call or visit the website.

-- rena the CPA (wsch 117360@aol.com), September 01, 1999.

My bank is offering a special rate for the next 4 months of 5.5% on checking accounts with a balance of over $20,000. If you fall under the $20K minimum, you get nothing! Keep your money in the bank, keep your money in the bank,.....

-- Bill (y2khippo@yahoo.com), September 01, 1999.