CDS's Betting the U.S. Treasury Will Default

[Brio]

The Market is Now Pricing In the Genuine Possibility that the US will Default on Its Debt (http://georgewashington2.blogspot.com/2008/09/market-is-now-pricing-in-genuine.html)


You've heard of "credit default swaps". They are a type of derivative where one person places a bet that a certain company will go out of business, and another person on the other side of the contract places a bet that the company won't go out of business (see this (http://www.marketoracle.co.uk/Article6335.html) and this (http://www.webofdebt.com/articles/its_the_derivatives.php)).

Well, people are now starting to increase their use of credit default swaps to bet that the U.S. will default on its ability to pay on its treasury debt.

An article (http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/09/21/ccliam121.xml) in the Telegraph from today includes a here (http://www.telegraph.co.uk/money/graphics/2008/09/21/ixliam121.jpg) showing credit default swaps on US 10 year treasury debt, and explains:
"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."

[Glass]

right at the end they say the risk is low that it will happen. Seems odd to write that whole article on a slight chance. I just want to know how to do it. that all I ask then leave me to it.

[Weho Dave]

Why would the U.S. default when they can just create more FRNs out of thin air to pay back the previous ones borrowed?

[naccarato]

Treasury Bonds, the mother of all bubbles. In all of the excitement of the last two day stock rally I hardly heard anything about the plunge in bond prices on Friday.


http://finance.yahoo.com/echarts?s=%5ETNX#chart1:symbol=^tnx;range=5d;indic ator=split+volume;charttype=line;crosshair=on;ohlc values=0;logscale=on;source=undefined

[Portmanteau]

Why would the U.S. default when they can just create more FRNs out of thin air to pay back the previous ones borrowed?

Because foreigners will not accept the devalued Federal Reserve Notes and/or they stop buying Treasury paper outright.

When they bought Treasury paper, they expected to be paid back a whole "pie" for every US dollar. Printing more means they'll get only one slice of the "pie" - a possibly very tiny one - instead of that whole pie.

[Brio]

Why would the U.S. default when they can just create more FRNs out of thin air to pay back the previous ones borrowed?

A matter of what the FRN is worth to the U.S.'s creditors I think.

[Tn...Andy]

When they bought Treasury paper, they expected to be paid back a whole "pie" for every US dollar. Printing more means they'll get only one slice of the "pie" - a possibly very tiny one - instead of that whole pie.

Well, gosh.....I don't think it's our fault they were so stupid as to send us real things for paper promises.

[Weho Dave]

So give them more slices. Simple.

[Brio]

Reminds me of an article I read about 2 years ago (sorry no idea where) that said 70% of US held foreign debt is non-US$ denominated. So even back then US lenders were betting against their own dollar.

[Agamemnon]

Treasury Bonds, the mother of all bubbles. In all of the excitement of the last two day stock rally I hardly heard anything about the plunge in bond prices on Friday.


http://finance.yahoo.com/echarts?s=%5ETNX#chart1:symbol=^tnx;range=5d;indic ator=split+volume;charttype=line;crosshair=on;ohlc values=0;logscale=on;source=undefined



EXACTLY !


Its not the dollar I'm worried about, its monetizing debt that concerns me.



.

[GOLD DUCK]

QWAK,The FACT is -- the USA DEFAULTED and went BUST Aug.15,1971 and has been LIVING on CREDIT ever since -- IT has ALL been an ILUSION and NOW that ILUSION and the DELUSION of WEALTH and endless PROSPARITY in the USA is OVER! :rant:

No one wants to believe IT yet but THAT don't change REALITY and when ILUSION and REALITY COLIDE it is sort of like what happens when MATTER and ANTIMATTER come together --- INIALATION --- BIG BOOM/BUST and DEVISTATION!:favorites21::censored::yes:

INVEST in FOOD you can store for a long time at home!:yes: THAT is the single BEST investment any one can make right now, because the time is coming when IF there is food to buy it will be way MORE expencive to buy and real soon! :spam4:

Aint no "FARRY GOD MOTHER" with a wand that can turn a PUMPKIN and 4 mice in to a ROYLE COACH and 4 white horses! That don't happen in REAL LIFE!! :hahaha::haha:

In real life the PUMPKIN rots and gets all moldey and the mice get in your pantry and eat your food or spoil it so YOU can't eat it with out geting SICK! :banghead::puke::s10:

the DUCK

[SWRichmond]

QWAK,The FACT is -- the USA DEFAULTED and went BUST Aug.15,1971 and has been LIVING on CREDIT ever since -- IT has ALL been an ILUSION and NOW that ILUSION and the DELUSION of WEALTH and endless PROSPARITY in the USA is OVER! :rant:

The Duck is correct.

QWAK!

[Meliorist]

Why would the U.S. default when they can just create more FRNs out of thin air to pay back the previous ones borrowed? Because they can't do that without an act of congress and such an act would be (rightfully) viewed as default and be accompanied by seizures of American assets in foreign lands.

The US doesn't print at will, it borrows at will, at terms agreed to with the lenders.

[Lovemonster]

The problem with betting on the end of the world is it doesn't leave you much time to spend your winnings.

[elroy]

Because they can't do that without an act of congress and such an act would be (rightfully) viewed as default and be accompanied by seizures of American assets in foreign lands.

The US doesn't print at will, it borrows at will, at terms agreed to with the lenders.
The day will come when they will print or create digitally lots of $$.

I think it will be done without the knowledge of congress or the public.

There are already questions about the massive amount of T bills bought through the Cayman Islands.

[LukeNM]

QWAK,The FACT is -- the USA DEFAULTED and went BUST Aug.15,1971 and has been LIVING on CREDIT ever since.

For those that do not know!

http://www.financialsense.com/fsu/editorials/bms/2006/0511.html

[Bill843]

Well it's all no problem really, Paulson just needs to make it a law that nobody in the entire world can short any part of the US government or any US business, or any foreign business that the fed reserve has propped up, or any foreign business that the fed reserve says that they might need to prop up at some point in the future, but that "is on solid financial ground today".

-end-

[Meliorist]

The day will come when they will print or create digitally lots of $$.

I think it will be done without the knowledge of congress or the public.

There are already questions about the massive amount of T bills bought through the Cayman Islands. You're right that the Cayman purchases are already being questioned but these purchases need plausible deniability to work. The Government can create fictitious buyers in many places to extend this deniability to its extreme, but there's no way they can purchase another trillion of treasuries through this scheme and get away with it. And they'll be issuing at least $3 trillion over the next 3 years.

[Portmanteau]

Well, gosh.....I don't think it's our fault they were so stupid as to send us real things for paper promises.

Well, at least some of the real things are worth anything. :D

You're right...they were STUPID to invest in funny "money."

[Portmanteau]

So give them more slices. Simple.

Not simple. They were expecting the whole pie. Inflation means the slices get ever smaller. They don't want 8 slices...all 1 micron in diameter.

[Twisted Avatar]

Why would the U.S. default when they can just create more FRNs out of thin air to pay back the previous ones borrowed?

Because all the local sheep ,the moms and pops, by the million gets wiped out of everything in one fell swoop.

There will be a workout package for the big fish that hold T-bills internationally but no such luck for the local serf.


T

[Portmanteau]

QWAK,The FACT is -- the USA DEFAULTED and went BUST Aug.15,1971 and has been LIVING on CREDIT ever since -- IT has ALL been an ILUSION and NOW that ILUSION and the DELUSION of WEALTH and endless PROSPARITY in the USA is OVER! :rant:


Yup! :applause_

[FireMattMillen]

Default of the US government is the conclusion of the economic collapse. All of this about AIG and Lehman is so comparatively small that it is basically irrelevant. Default of the government, by definition, means a collapse of the dollar.

I'm taking/cashing in all of my T-bills from the bank tomorrow morning...

[Weho Dave]

Hyperinflation does not equal default. It makes loans easier to re-pay. The full faith and credit of the U.S. remains and has to date never been violated, and that is the only thing that backs up the FRN. As for who will buy the treasury bonds, the Fed will as they already have been. It is all a shell game. China does not want to see the U.S. default because they have Trillions, so they will continue to play ball. The coming hyperinflation could take years to play out. It is a slow train wreck. There is no advantage to anybody if the U.S. defaults, so it won't happen.