What we really need to worry about is whether China and other foreign countries will continue to buy our treasury bonds. They really have every incentive to do so. But it's looking like the bailout monetary expansion might tank the dollar, which would put China to the test. I don't know that blaming the short sellers is really the best course here. We should expect people to respond that way.

whoa whoa whoa, I don't think a US bankruptcy would be the end of civilization. Shit would get tough, true, probably even worse than the 30's, but I don't see a Mad Max, cannibal rape gangs, total anarchy scenario unfolding. We have to remember that as bad as things might get, we've seen worse before. I mean, a least we don't have a freakin civil war going on.

Reading the article my take is the predicted outcome is not a collapse of the treasury but either hyperinflation or restructering of US debt. Looking at the way we have spent money over the last eight years and our plan to get out of the hole by spending even more money that seems like a pretty safe bet. Since I don't have piles of money to buy US CDS's my bet is to not prepay any low intrest debt that I have. My home mortgage is at 4.75% and I don't pay one dime ahead on it. I do need to work on prepaying any potentially variable debt like credit cards and student loans. I was afraid that I made the wrong bet with all the talk of deflation but I really don't think that will be the case.

Thank you for explaining it, Jonathan. I have only the foggiest grasp of economics and the arcane world of trading but your October post shed a lot of light on it.

Every time some numbskull Republican acquaintance of mine bleats that only deregulation and lower taxes can solve whatever problem, I am going to throw your article back in their face. I am going to memorize the numbers.

It's like the Pinky and the Brain episode where Pinky and Brain subscribe to every newspaper printed in order to construct a paper-mache duplicate of Earth. Only in real life it's traders, and they made a duplicate economy bigger than the economy of the planet, and they made it out of worthless paper and spit.

Good Gawd Damn.

It reminds me of the

I still think these people who knew what they were doing, screwing with the system to make a quick buck, are like (and possibly are) war profiteers. Only one solution for them.... Hanging in the public square. Or possibly rendition to a black ops site. This activity is worse than speaking out at protests, yet while protestors are following the rules of the constitution, they are pepper sprayed and jailed. These economic snake oil salesman are the worst kind of offenders, and the charge is straight up treason. They should be tried and hung.

It appears to me that the economy has actually more or less stabilized, and I don't see things getting a hell of a lot worse in the foreseeable future. I do believe that, over the coming years, runaway inflation is going to be a major concern, though. To that extent, Mr. "Guns and Gold" probably isn't too far off the mark, albeit not for the reasons he believes. No, we're not going to see panic in the streets and anarchy. But any investment in tangible goods, versus an on-paper-only investment that realistically only exists on a computer somewhere, will most likely prove very smart over the short term.

And yes, Golob, I thing T bonds are a good investment also. The day they become worthless nothing else will matter very much any more.

But what will this mean for rapid transit bonds?

I made a fortune buying bonds last year, but the yields have gone progressively down. Now with the interest rate as low as it is, you'll not be able to sell those bonds for very much in the future.

One of the benefits of allowing AIG to fail would have been the macro-economic bears would have been wiped out. They are leveraging the money they've created out of thin air by shorting these instruments into additional capital to bet against large sections of the economy.

Deal them a blow and you make it easier, cheaper, and faster to get to economic recovery.

China is making a move to save us. Not to own us -- that wouldn't be profitable to them -- but to ensure we have continuing debt for them to buy and flip for a profit on the economic upswing.

They're slowly pushing smaller and more cautious investors out by scaring them with repeated news stories about how they're afraid the US is a risky investment (while secretly buying larger and larger chunks of our debt).

I've got a sinking suspicion that a withdrawal of certain credit obligations coupled with strangling import groups (and outsourced manufacturing) will effectively wipe out a few hunks of economic get-go from the market and they can proceed to profit when the market sweeps back to normalcy.

'cuz if we aren't going to kill our corporations, someone else will.

Jonathan,

The blog post you linked to (which was really informative; thanks) makes an important point that goes against what you're saying here. Basically, he's saying the the word "default" in "credit default swap" is misleading insofar as the actual contracts that exist in today's market make reference to virtually any kind of credit event (e.g., restructuring).

So, part of what he's taking some of the pundits to task for is implying (or outright stating) that purchasing CDS is "betting on failure," when it's actually more like betting on continued or increasing uncertainty.

Now, as far as speculation goes, that seems right up their with war-profiteering in terms of sociopathic money-making schemes, but it's *not* betting on the failure of the U.S. Treasury. It's a wager that enough people's fears about certain debts not getting paid off in full will get worse (thereby increasing the spread) between the time the trader purchases the CDS and the time he has a chance to sell it off.

Again, I am not saying this is good or okay, but I am saying that the blogger you quote offers a plausibly less apocalyptic interpretation of these numbers than you are.

golob et al. - i think you all are forgetting about the other side of the transaction. For every bet that the bonds will not perform to original agreement someone is betting that they will. If the bonds payoff as per schedule the people buying the insurance will lose.

The problem seems to be the unregulated nature of the market and the fact that people insuring the instruments may not have the resources to pay what they owe.

I've been told by an insurance agent that if we get the big quake the companies covering that segment will not have the money to pay all the damage. In any situation where a very wide area of damage can occur, such as the bond market, insurance is likely to fail.

Lee and wl: I intentionally linked to a relatively sympathetic post. The author came up with a justification (of sorts) for the behavior.

I still find it reprehensible.