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Uncle Sam's 'F' Rated Bonds

The dollar is the global currency, and the Federal Reserve can print dollars if no one wants to buy new Treasury securities to pay off maturing bonds and finance new spending.

Nevertheless, U.S. Treasuries are risky investments.

Internationally, interest-bearing Treasuries function much the same as currency -- sitting in bank vaults, they back up deposits, serve as collateral for loans and derivatives, and are accepted as payment for goods and debts.

However, whether as Treasuries or currency, too many dollars in circulation will instigate inflation when the global economy picks up steam.

Just the fear of inflation causes investors to demand higher interest rates on virtually all dollar-denominated bonds issued by government agencies, banks and corporations.

As Washington continues to spend and borrow, the Treasury will have to offer higher rates on new 10- and 20-year bonds, making comparable securities issued in 2013 and earlier worth less in the resale market.

That interest rate risk makes long-term U.S. Treasury securities lousy investments -- they have no place in most retirement portfolios.

For rating agencies, Washington's monopoly on printing dollars makes it difficult assigning a conventional rating between AAA and D on its bonds. Those can't default but investors' capital is still at risk.

Perhaps a special grade: "F" -- flee now before you get stuck.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Professor Peter Morici, of the Robert H. Smith School of Business at the University of Maryland, is a recognized expert on economic policy and international economics. Prior to joining the university, he served as director of the Office of Economics at the U.S. International Trade Commission. He is the author of 18 books and monographs and has published widely in leading public policy and business journals, including the Harvard Business Review and Foreign Policy. Morici has lectured and offered executive programs at more than 100 institutions, including Columbia University, the Harvard Business School and Oxford University. His views are frequently featured on CNN, CBS, BBC, FOX, ABC, CNBC, NPR, NPB and national broadcast networks around the world.

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