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Ruh Roh — People Are Worried About U.S. Bankruptcy, and Insuring the Risk February 23, 2010

Posted by Michael in Economics.
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The price of credit default swaps on U.S. Treasury securities is rising.

Meaning, people are actually starting to seriously contemplate that the U.S. could default on its debts like some banana republic, and are protecting themselves from the risk.

[T]he rise in the cost of insuring against a US default is worrisome. It’s a highly negative signal from the market. People are willing to bet that the USA can’t get its financial house in order. Peggy Noonan is hardly a great economist, but I think her WSJ column today captures at least some of what’s happening in the sovereign CDS market:

Wait.  Wait just a minute.  Peggy Noonan is talking  sense again?

“People are freshly aware and concerned about the real-world implications of a $1.6 trillion dollar deficit, of a $14 trillion debt. It will rob America of its economic power, and eventually even of its ability to defend itself. Militaries cost money. And if other countries own our debt, don’t they in some new way own us? If China holds enough of your paper, does it also own some of your foreign policy? Do we want to find out? And there are the moral implications of the debt, which have so roused the tea party movement: The old vote themselves benefits that their children will have to pay for. What kind of a people do that?

The CDS market is sending us a signal. Do we have the will to listen?”

via What, Me Worry? Credit Default Swaps on US Treasuries – ProfessorBainbridge.com.

Bottom line — when smart money starts betting against the solvency of the United States of America, you know we are in deep shit.

Hey, the smart money is worried about the same thing as those racist redneck teabaggers.  Imagine that.

Thanks to Doug.

UPDATE below the break.

The result of an USA default is our own economic implosion.  And by “default,” you have to include not just formal debt repudiation, but the back-door default of hyper-inflation.

Since WWII, the dollar has been the unit of international exchange by necessity, simply because we were by far the largest and most stable economy on earth. That means, there are trillions of dollars out there which are owed by the U.S., but which really have nothing to do with us or our economy. They are simply circulating in the world economy, based upon nothing more than everyone’s confidence in the “full faith and credit” of the USA. The dollar is the world currency, not just the USA currency.

The Euro has been vying to achieve a similar status, but they are not there yet, and probably never will be. They are handicapped by their systemic demographic issues, which have doomed them and their economies to decline on the world stage, and by their lack of political cohesion. Same thing with the demographically baked-in decline of Japan. In short, everybody knows that Europe and Japan are cripples. By comparison, we are just limping. China is still a third-world economy. Ignore their military investments — which are all just showmanship.   India is the real challenger,  because they are investing where it matters — education and capital investment.

If confidence in the USA collapses, and it could happen overnight, and there is a panic “run on the bank,” the operative economic principle is: “the shit will hit the fan.”

Do you think the current crew in D.C. is smart enough to keep this from happening?

Yeah, I have my doubts also.  Meaning, you better own some ammunition.

Uh, have you noticed the skyrocketing price of ammunition lately, or the stuff that is just plain out-of-stock?

That’s the dark side of the rising price of credit default swaps. People are hedging their bets against the survival of the USA in its current form.

I still think the American people have enough common sense to get us back on track. The Tea Party movement affirms my basic confidence in us as a people, and our adherence to some core values.

We’ll see. I’m still putting money into my 401K.  It’s gonna be an interesting decade.

Comments»

1. GrumpyUnk - February 22, 2010

Unfortunately, I’m ignorant on a lot of these things but the little lizard, lower end of my brain stem has been pinging me about bad shit to come for several years now and I’ve become a closet Doomer. Reading this didn’t help my paranoia any.

So just what do you think would be the result of the USA declaring insolvency?

2. Michael - February 22, 2010

^

GrumpyUnk, you are right to be a little scared. See my update to the post, where I address the worries of you, me, and other “Doomers.”

3. GrumpyUnk - February 22, 2010

Pretty much what I thought but I like to hear what intelligent folks have to say on things like this.

I’ve got ammo. It’s the only precious metal I’ve ever been into acquiring.

My retirement outlook has never been real bright as I spent the first 40 years drifting along with the current and drunk most of the time. So I may be better off than a lot of folks as I have less distance to fall and a lot more practice at being broke. We’ve been gearing up for a more basic self sufficient lifestyle for the last few years that resembles how my parents and grandparents lived. Raise a lot of our own food and can it, chickens, fruit trees etc.

I appreciate the Tea Party folks and have become a lot more involved in the last 2 years but I just don’t have much faith that there are enough good people left in this country. I get inundated every day in the ER with government supported morons who have know friggin clue how or desire to know how to do anything for themselves. And they breed like rabbits.

If I get a vote, I choose a Zombie apocalypse over a dollar collapse.

BTW – You may want to read this story/short novel on this exact topic.

http://johngaltfla.com/blog3/category/the-day-the-dollar-died-series/

Thanks again for the thoughtful response.

4. Michael - February 22, 2010

Pretty much what I thought but I like to hear what intelligent folks have to say on things like this.

Thanks for that, but you unfairly ascribe to me the title of “intelligent folks.”

I’m just awake. I’m an average person who was lucky enough to get an education and pick up a few big words in my vocabulary.

GumpyUnk, you don’t have to be intelligent to figure out what is going wrong with this country. You just have to be awake, and have some values.

5. Michael - February 23, 2010

The Chinese are still buying our debt and supporting our currency.

They have no choice. If we go down, they go down.

That’s the beauty of international trade and codependency — we all are more invested in cooperation rather than war.

6. Michael - February 23, 2010

That’s also why China is helping to save us from doing stupid shit in the service of the AGW religion. They get it. They are following the actual science. CO2 in the troposphere is not really a problem, and they know that. It is just not politically expedient to say that out loud, like the Czech Republic does, much to the annoyance of the incestuous “international community.”

Why else do you think the Chinese would snub Barack Obama, a U.S. President, in Copenhagen?

In the near term, burning fossil fuels is actually a survival issue for them and their political elites; it’s just a lifestyle issue for us.

They had Obama figured out. They knew he was weak and inexperienced. They knew our interests, and their own, better than Obama. That’s why he was humiliated (in a Chinese way) and shown, for all the world to see, that he was irrelevant.

Thank you, God, for the Chinese.

7. geoff - February 23, 2010

Thank you, God, for the Chinese.

But, contra Michael and other optimists, the supposed demographic problems of China won’t save us. In 20 years if not 10, it will be a Chinese world.

Learn Mandarin. I am.

8. BrewFan - February 23, 2010

I don’t share geoff’s concern regarding the Chinese. Their political system is morally bankrupt and will implode one day just as the Soviet Union imploded. There is a reason the Chinese government works so hard at censorship and it has nothing to do with preserving Chinese culture. In the age of the internet I am very optimistic that the people of China will prevail over the political/military elite.

9. GrumpyUnk - February 23, 2010

“GumpyUnk, you don’t have to be intelligent to figure out what is going wrong with this country.”

Damn good thing for me!

10. doc - February 23, 2010

Assume the gop picks up both houses in nov. (big assumption, I know- I think they will win the house but fall short in the senate), do you think that will be enough to put us back on track? I don’t. Our problems won’t be solved in 2-4 years. Then assuming the gop drops the ball and/or the dims get their grubby paws back on the $$ spigot, they just erase any incremental improvements that have been made in whatever time it would take them to craft a another spendulous bill or draw up a ruinous budget. Guess I’m a doomer. We need to negotiate a peaceful secession – give the libtards their choice – east or west half of the country and buh-bye anchors around our necks. A guy can dream.

11. MostlyRight - February 23, 2010

I don’t own a gun, but I consider it good practice to have lot’s of well-armed friends.

12. sandy burger - February 23, 2010

That’s also why China is helping to save us from doing stupid shit in the service of the AGW religion. They get it. They are following the actual science.

They’re not following the science. They’re following their narrow self-interest. The fact that they’re right on this is a coincidence.

CO2 in the troposphere is not really a problem, and they know that.

They don’t know that. It’s just that they don’t care one way or the other.

Look at all the crap they dump in the water. That really is a problem, but they still do it.

13. sandy burger - February 23, 2010

They had Obama figured out. They knew he was weak and inexperienced. They knew our interests, and their own, better than Obama. That’s why he was humiliated (in a Chinese way) and shown, for all the world to see, that he was irrelevant.

I wonder if Obama even realizes this? I suspect not, but I don’t know.

14. sandy burger - February 23, 2010

In the age of the internet I am very optimistic that the people of China will prevail over the political/military elite.

Which brings Chinese culture to the forefront.

And there… things look mixed, frankly. Confucianism runs deep.

15. BrewFan - February 23, 2010

Confucius say:

Man who flies plane upside down have hairy crack up

16. sandy burger - February 23, 2010

geoff:
Learn Mandarin.

Great idea!

In Brewfan’s honor: Michael, 吃 我. (Michael, chī wǒ.)

17. TXMarko - February 23, 2010

Learn Mandarin.

No tickee, no shirtee.

18. Michael - February 23, 2010

I’ve heard/read that Christianity is making huge gains in China, mostly through the underground “house church” movement rather than the officially recognized Christian church.

19. BrewFan - February 23, 2010

Thanks sandy! I think.

20. TGSG - February 23, 2010

Michael,

You do know that there has been talk about .gov confiscating 401’s and forcing them into treasuries, yes?

21. wiserbud - February 23, 2010

Learn Mandarin.

15 minute.

22. wiserbud - February 23, 2010

Or is that Cantonese?

23. Tushar - February 23, 2010

On an OT note: Fcuk the person who invented the word ‘meme’ . Fcuk him with a cactus. That word is so lame, other words don’t want to sit near it.

24. lauraw - February 23, 2010

You do know that there has been talk about .gov confiscating 401’s and forcing them into treasuries, yes?

That would be a very smart move on their part, politically. They should absolutely discuss that notion much more openly, and propose legislation to that effect. It would be even smarter if they would prominently demonize 401K owners as the uber-wealthy robber baron scum that we all know they are.

I think Obama should sneer a bit when he says ‘401K,’ just to let everybody know where he stands on the personal investments of the lily-white gilded class in America.

Push that envelope. Push it. The Audacity Of Hope can’t just be a book title. Live it. Be just that Audacious, O.

25. Michael - February 23, 2010

You do know that there has been talk about .gov confiscating 401’s and forcing them into treasuries, yes?

Yes. Won’t happen; it’s politically impossible. Even if it did, it wouldn’t get past a constitutional challenge, even with the most liberal SCOTUS. We’re not Argentina. Yet.

26. wiserbud - February 23, 2010

Won’t happen; it’s politically impossible.

Ooooooh, but I so want to see him try. Then watch his supporters tell us all again about how he’s not a Marxist.

27. TGSG - February 23, 2010

“it’s politically impossible.”

Like voiding contract law during a government takeover of private industry is “politically impossible”? Like that or some other way? 😉

28. Andy - February 23, 2010

it wouldn’t get past a constitutional challenge

Neither would 99% of the other laws that have been passed since FDR.

29. TXMarko - February 23, 2010

If the OblammaCare tax grab fails as expected, the next likely victim is the 401s.

They have to get more money somewhere, and soon.

It is NOT going to be pretty, no matter how it goes down.

30. xbradtc - February 24, 2010

China’s commie govt. may well fall, but it won’t be because of the internet, per se.

Repressive regimes almost always fail in that they aren’t repressive enough. When there’s incremental improvement, such as their weird blend of communism and capitalism, they let slip the reigns that have held the population in check, and soon lose control of the whole enterprise. See the Soviet Union, see Iran in ’79.

31. BrewFan - February 24, 2010

The internet will be the accelerator, xbrad. Repression becomes exponentially harder the more information the people have. The internet is like Radio Free Europe on ‘roids.

32. Russ from Winterset - February 24, 2010

Don’t underestimate the power of LOLcats, xbrad.

33. China - February 24, 2010

RORcats? We rove RORcats!!!

34. it's me - February 26, 2010

Somebody earlier said, paraphrased, “Invest in precious metals. Gold, Silver and Lead.” I agree with that. And short treasuries.


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