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

George Washington’s Blog [1]
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 [2] and this [3]).

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 [4] in the Telegraph from today includes a here [5] 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.”