US 5-year credit default swaps rise to highest since 2011
reuters.com
reuters.com
The reason why this is illogical is that there is very little distinction between "the dollar" and US sovereign debt. It applies to all countries in a similar situation, for example "the Yen" and Japanese Government Bonds. It doesn't quite apply to odd cases like, IDK, Spanish sovereign debt in EUR and "the Euro" since the Spanish government does not control all forms of the issuance of the currency of the bond.
What they were doing is identifying pairs of securities whose values had diverged and they believed would eventually converge. They would short the more expensive one and buy the cheap one. When they converged they would sell the no longer cheap one, use the money to close out the no longer expensive one, and collect a profit.
However usually the reason why one was more expensive is that it had a more liquid market. So people could safely invest in it with money that they might need back quickly. This shouldn't matter if you planned to buy and hold though..at least in theory.
But in the wake of the Russian default, liquidity became more valued. So people sought to get rid of illiquid securities and buy liquid ones. This meant that LTCM had shorted things that were rising in value, and bought things that were falling in value. So they had a loss. And as the shorts got higher, they wound up having to sell assets at a loss to cover their shorts. And now the temporary losses became very real ones, and drove them bankrupt.
However, infamously, their investments made money in the end. They just weren't able to last long enough to benefit from it.
While most of their strategy was convergence arbitrage, if I recall from the book, they thought of selling short equity options as a form of selling insurance.
People buy these options to insure against some event and they expected more buyers than sellers, so LTCM figured they would profitably be the provider of it. Well-structured insurance is always a loss to the buyer (they take in more than they pay out).
I was working in the city shortly after LTCM failed and one of the interesting things I heard is that several large European institutions were using LTCM for overnight treasury. So at cob in Europe they would sweep funds into LTCM and then move them out the next morning for trading. If that was actually the case it would have caused massive fluctuations in their assets during the day which would be extremely hard to manage.
While that's true, Spain could go the tax route and say "gimme more euros this year" or sell off assets it owns. I guess a printer is faster (if they feel like it) but medium-term, developed countries have lots of tools to pay down debts (if they feel like it).
For some reason, people are more comfortable with inflation as a tax than taxes.
Because everything doesn't inflate at the same rate at the same time. That means the average person has some theoretical room to reconfigure their spending to minimize the impact of inflation. Ordinary people have no legal options to minimize the impact of higher taxes. That requires expensive CPAs and lawyers.
(Right? What did I miss by not taking Econ 102?)
What the average person forgets is that some people (and businesses) have wayyyyyy more debt, so when it gets diluted, they're a net loser on average.
Kinda like getting a $1000 stimmy cheque while large capital owners gets their equity saved by government bailout money. Everybody wins something, but winning last place isn't a win when no real wealth was created.
Thanks for coming clean.
The true credit risk on US Treasuries is indeed an abstract and mysterious creature. Nobody knows what would such a "default" mean in practice, what paper would get paid up and what paper would not get paid. Would commercial bank deposits at the Fed get paid? And if not, then what does it even mean to "pay in dollars"? Like how do you achieve "paying someone X dollars", do you deliver printed currency?
For example, suppose you’re running a company that has won a government contract and you receive scheduled payments from them. You use the payments to pay your suppliers and employees. If you don’t pay your suppliers and employees on time it causes all kinds of problems.
If the government looks like they might delay their next payment to you, you can “buy insurance” so that you can still make the payments. Is this gambling? Maybe? But if you don’t gamble there are real consequences, so “not playing” is still “gambling”.
It’s not really ludicrous, the US Treasury isn’t selling bonds of every duration every single day. You need some kind of framework to outline which Treasuries are acceptable to settle derivative contracts like futures/options/CDSes since Treasuries are not directly fungible like equity shares or commodities.
In a parallel universe the US has entered a short technical default just slightly before SVB's collapse, which allowed them (if CDS insured) to collect all MBS at par value.
Long treasuries (>1 year) are issued at very close to par and do pay coupons. A treasury that is trading at 50-something cents on the dollar has lost a lot of value (because it has a lower coupon rate than newer treasuries).
.. there are special rules which trigger even in a short default allowing a fair bit of money to be made turning the CDS into a sensible bet on a short duration US default.
In theory, a CDS is “insurance” if a bond issuer defaults.
In reality, CDS’ are used to go in and out of positions on companies because contracts are too difficult and expensive to cancel. The end result is big firms end up with huge, complicated CDS positions all over the place for 5-10 years until the contracts cancel.
A CDS on the United States is another stupid end result just like CDO2 vehicles were.
The CDS market is just so incredibly flawed when markets are stressed.
A no-nonsense solution would be to make raising the debt ceiling part of the annual budget or any bill that that has an impact on the budget. Another potential solution would be to make increases on the debt ceiling automatic based on a percentage of GDP, or over time. Another solution would be to reduce the national debt. We have options, and it almost doesn't matter what we choose because our current path is too volatile.
Also, it's not just "the minority party". Ever single debt ceiling crisis since 1995 when the Gephart Rule was repealed has been instigated by the Republican Party.
Maybe we should revisit those decisions. Even individuals revisit decisions, it is insane that we don't revisit certain decisions.
Even if we agree to pay for things, is the government at peak efficiency? There is so much wastage at every level in the govt. Rather than blame Republicans, maybe ask why Democrats are against a more efficient govt (that can still be large and fund their pet programs).
https://www.cnbc.com/2023/04/18/heres-how-the-federal-govern...
> The U.S. has lost almost $2.4 trillion in simple payment errors over the last two decades.
This is just at the federal level.
Maybe you could revisit those decisions by passing laws that directly change them, instead of threatening to keep the decision in place and just not allocate the funds you promised for it?
Was wasting trillions of dollars also part of the original promise? No. So the original contract has already been broken.
Btw, not all spending is "promised" spending. Around 30-40% is discretionary spending. Spending that was not promised and is optional. This is on top of the massive levels of waste.
Isn't that what the annual budget process is about? Why do we need a separate process to allow for the borrowing to make the payments for the things that were individually authorized (often with renewals every so often) and then collectively authorized in the budget?
If you don't think the programs are efficient enough as it is, the collosal waste of a government shutdown should be a definite no. Those waste money in that there's extra work to prepare for closing and to reopen, that prevents people from doing the actual work they should be doing, as well as the fact that all of the government workers unable to work because of the shutdown end up getting paid anyway.
Well, you answered your own question. There is a separate process because the budget process has been broken in a spectacular way.
> If you don't think the programs are efficient enough as it is, the collosal waste of a government shutdown should be a definite no. Those waste money in that there's extra work to prepare for closing and to reopen, that prevents people from doing the actual work they should be doing, as well as the fact that all of the government workers unable to work because of the shutdown end up getting paid anyway.
Can you quantify that?
It's unlikely it does that. If it came to a court the judge would have to decide which of Congress's instructions take precedence or how to reconcile them. That falls into territory of implied repeal and reinterpretation of the Federal Reserve Act.
If the Democrats had any backbone, they would instruct the Fed to pay what Congress has authorised and if the Fed said 'no', take them to court to force an interpretative judgement to settle the matter. (which I call the 'empty chest' problem).
Which would almost certainly involve reading section 15(1) of the Federal Reserve Act using the same 'futurity' that the courts have used in appropriation bills.
(ie the deposits it talks about are past, present and future deposits).
That would imply a balancing amount held at the Fed, and the debt ceiling stops the Treasury refinancing that balance into bonds.
Both the spending and the debt ceiling requirements of Congress are then satisfied - and the tool is neutered.
Nationstate finances are not the same thing as personal finances or corporate finances. Trying to paint them the same is misleading at best and actively harmful at worst.
It's worth noting that I wasn't comparing nation-state finances to personal finances at all. I was only comparing US federal finances to US state finances.
Great summary. That's why, if there's going to be something like a debt ceiling, it has to be part of the budget process, not a separate part of the debt-repayment process. You don't boycott paying your credit card bill. You stop putting more purchases on it.
Granted, the one step follows the other. But Congress is manifestly unable to backpropagate consequences by one step.
So if we're going to have a guardrail, it has to be in the right place. Yet somehow this middle way is never considered. Instead it's just "debt bad" or "debt ceiling bad". People always with the dumb binaries and false dichotomies.
Have Democrats ever actually made such a big deal out of this though? It seems like the increases were fairly painless during the Trump years when the Dems controlled the House.[0]
[0]https://www.cbsnews.com/news/whats-in-the-budget-deal-negoti...
Actually, if the Dems had done this in response to Trump's tax cuts, I think the Republicans would have been pretty cornered. After all, the three things you can't touch (and the GOP have promised not to this time around) are the military, Social Security, and Medicare.
I know what I’m writing sounds charged and partisan, but is it wrong?
How does that apply to the debt ceiling?
Fixed that.
And the Republicans only caring about it when they're in power should give you some indication of the level of commitment they have to smaller government.
Chat gpt is trained on the internet. The ratio of bad advice to good advice on the internet is about a million to one.
1) it’s an event that can’t happen unless a lot of powerful folks take a bath. Odds are good that energy will be directed to prevent it - or failing the ability to muster energy, you won’t care.
2) If the dollar collapses, what asset would you want to hold? Would it make sense to hold that asset absent a crash?
Says you, and without even the hint of an argument to back your position.
Alternately, in the event of a dollar default - the world may not be conducive to the capex+energy expenditure required to mine crypto. If interest rates went to 20-30%, I’m not sure that crypto mining would be a viable concern - causing instability throughout the crypto world.
That being said, whether crypto is a good hedge or not really depends on whether it’s worth putting money in today - regardless of the potential for US default. Particularly in comparison to Yen, euro, and yuan assets.
“Dollar collapse” means a collapse of the US government.
In that case, holding land becomes very literal, you must physically occupy and defend it; your deed to some property may not be worth much.
You would require a failure of the federal, state, and county government for this to occur
In a situation where the federal government ceased to be - I don’t think it’s fair to make any assumptions on what successor states would look like. Nor what boundaries thise successor states would keep.
A collapsing dollar may not happen abruptly (which would happen in a war on US soil), but could happen slowly. In that case, holding US land (and plant&equipment etc) does still make sense, as these things will continue to function and provide goods.
Land: hard to hold when the government collapses.
Also, the first thing a failing govt is going to do is raise taxes on things that can't be moved about, like land.