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The Market is Now Pricing In the Genuine Possibility that the US will Default on Its Debt

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George Washington’s Blog
Sunday, Sept 21, 2008

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 and this).

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 in the Telegraph from today includes a here 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.”

This article was posted: Sunday, September 21, 2008 at 4:43 am





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