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Monday, September 22, 2008

Default by the U.S.: No Longer Unthinkable

There IS a tipping point somewhere out there. NOBODY actually knows where it is, but we are now a lot closer…

Financial crisis: Default by the US government is no longer unthinkable: “But, in the run-up to the US election in November, Democrats in Congress - and even some Republicans - may decide they're simply not having it. How much more can the US taxpayer take? It sounds insane, but the liabilities being taken on by the Fed and the US Treasury are now so enormous that the government itself could default. No?

Check out the chart showing the recent spikes in the US 10-year credit default swap. In other words, the market is now pricing-in the genuine possibility that the US will struggle to pay-back some of its long-term T-bills.

That possibility is still deemed to be quite low. But the ultimate financial question - until recently, unthinkable - is now being asked. Yes siree, the mighty US government could default. That's how much the world has changed.”

If you had to bet, do you think the (actual) smart money is 'going long' into this short covering rally in equities... OR using this sudden lift to discretely sell and quietly exit? The U.S. isn't even in a CONFIRMED recession yet...


Anonymous said...

I understand the use of CDS as trading vehicles, yet, in the grand picture, CDS on 10 year treasuries is an utterly ridiculous notion and symptomatic of the blinded-by-greed Wall Street modus operandi for the past 25 years. As a trading vehicle, yes they work great -- buy the swap a few months ago and sell it today and you've made some bank. But consider what the swap actually does and means: when I write the swap, I promise to deliver in full the par value of the 10 year should the gov't default. What entity believes they are so decoupled financially from the solvency state of the US gov't that they would be able to deliver on settlement?!


-Mike J

Anonymous said...

amen to that Mike J. It's ludicrous to me that the banks are still allowed to create these unregulated securities, when they have seriously contributed to the recent market panic.

Mike M

Unknown said...

But there's great news, fellas. Now that GS and MS are "banks", they don't have to take negative marks like the rest of the real world. Problem fixed!

Ben, are you shorting Treasuries? I agree with your take, but I suspect another rule change.