Balkinization: An interesting disconnect

Comments:

Default is not the only remaining option in the absence of Congressional action. Many believe that Obama will either invoke the 14th Amendment or simply ignore the debt ceiling if Congress fails to act.

# posted by

Proudhon : 6:01 PM

intrade is not representative. its very hard (impossible) to get funded from the US as most banks see this as online gambling and block transactions. Even when i lived in london it was hard to get an account it funded through a UK account. which means the info content from knowledgable U.S. folks is limited.

on the other hand, CDS spreads are finally showing signs of stress.

http://www.bloomberg.com/news/2011-07-26/u-s-debt-default-swaps-invert-for-first-time-chart-of-the-day.html

# posted by

dwb : 6:36 PM

also, i should have pointed out, this is not a contract for default. This contract is for congress to approve a debt limit increase of 15.1 Tn or more by xxx date.

There are ways are ways that the U.S. congress can pass a debt ceiling increase - not default - and this contract still does not pay. for example, if they pass it at the last minute (midnight august 1st). Or, if they pass a temporary smaller increase (to 15.09 Bn, a .806 Bn increase from the current 14.294 Bn) - then argue about another increase in sept. .806 Bn would get the treasury through probably sept, maybe oct. in that case neither the july nor august contract would pay - and the U.S. would still not default.

# posted by

dwb : 7:00 PM

I very much appreciate dwb's illuminating clarifications. He's certainly correct the the failure of Congress by midnight on July 31 to pass legislation does not logically entail default.

Does this really mean that all of us should simply ignore Intrade? (That's a decidedly non-rhetorical questin.)

# posted by

Sandy Levinson : 7:09 PM

Intrade has another market on the question of whether the debt ceiling will be raised by August 31 (currently that one stands at 73%) or September 30 (currently at 88.9%). So we can infer that the intrade participants collectively predict that the most likely outcome, by far, is that the debt ceiling will be raised substantially -- but that this will happen after July 31st. Whether or not that's right, it does seem more or less consistent with the predictions one would infer from the financial markets.

The New York Times reported today that there may be a little more cash left in the Treasury that would allow a few extra days or maybe a week of wiggle room. Since our political process seems to be heading inexorably toward some sort of very last-minute, 11th hour resolution of this ridiculous crisis, extra wiggle room is probably a good thing.

# posted by

Joseph Fishkin : 8:38 PM

"The markets" are dominated 95% of the time by two things. Short term traders operating on millisecond time frames and overall systematic liquidity, ie. money or various short term securities which are universally held to be 'money good;. The financial world is flooded with liquidity currently as trillions of dollars have been stuffed into the financial world by central banks and governments. Then too since so much income is being concentrated at top an ever growing total of all money is being deployed into the markets, as opposed to the real economy. Let me add a third thing, inertia.

There is no surprise that the markets are not acting any differently than usual.

# posted by

rapier : 9:24 PM

On my understanding, Congress could fail to raise the debt ceiling by July 31 and not default if:

a. Congress raised the debt ceiling on August 1 (Aug. 2 is the day of reckoning I thought).
b. Obama invoked one of the constitutional options and just issued more debt.
c. Obama could invoke the platinum coin option.
d. This may be semantic, but the US could choose to continue to service its debt but just not make other payments (e.g. Social Security checks). This would not be a "default" in a technical sense of the term.
e. I think dwb's point is correct as well.

# posted by

NHCTRes : 9:49 PM

not sure who you are asking. my answer is to never ignoredata, but always to look around for corroborating information. The CDS contract has its own significant limitations too (what is recovery rate!?). Intrade is useful for sentiment trends but there is not a lot of money behind that contract.

I am positive there are vegas oddmakers doing this bet, but not posted online that i can find (i am surprised i dont see it on bodog). That would be another interesting data point. maybe call bellagio and see if they will quote something. As a rule, I personally trust intrade much more when i see corroborating bets in an independent sportsbook.

# posted by

dwb : 10:33 PM

Does this really mean that all of us should simply ignore Intrade? (That's a decidedly non-rhetorical questin.)

Bluntly yes. Intrade contracts where there is no money on the line anywhere else (e.g. prop bets on U.S. politics) is better than nothing - though how much is up for debate.

Where there are literally billions of dollars of real money at stake, you're much better off looking at what people who stand to gain or lose billions are doing than what people who stand to win or lose a hundred dollars are doing.

# posted by

Brad : 11:15 PM

Sandy:

Follow the money.

Pay attention first to the folks buying bonds. If buyers see risk of default, they will demand risk premiums in their interest rates.

Secondarily, look at the rating agencies.

Lastly, look at the equities markets. They are a lagging indicator.

# posted by

Bart DePalma : 9:37 AM

Pretty much everyone has said that there will be no default on bonds - the Tsy will pay the interest. The question is who suffers. It ain't going to be bondholders. Timmy will see to that.

Even _if_ the govt. did fail to pay bondholders in Aug. (count me among those who are expecting a little money), there is every expectation that they will pay when they get this mess figured out. Again, bondholders will not be the losers in this charade.

# posted by

Andrew : 9:54 AM

Well, the market also didn't factor in the CDS risk, or overpriced Internet company valuations. This wouldn't be the first time that it failed to assess accurately.

# posted by

jpk : 2:56 PM

Our yodeler tells Sandy:

"Follow the money. "

I plan to follow the money from our yodeler's Tea Party bake sale.

# posted by

Shag from Brookline : 5:36 PM

The credit rating agencies told Congress today it needs to cut the debt and not just increase the debt limit to avoid a downgrade.

Meanwhile, Team Obama was doing it's best to predict Armageddon if Congress did not agree to a plan it has never released. The Dow dropped by nearly 200 points. Of course, some of that drop may be a reaction to the latest news of more slowing in the Obama economy.

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# posted by

اهله حال : 6:36 PM

Pure genius

BOEHNER: "Well, first they want more. And my goodness, I want more too. And secondly, a lot of them believe that if we get passed August the second and we have enough chaos, we could force the Senate and the White House to accept a balanced budget amendment. I’m not sure that that — I don’t think that that strategy works. Because I think the closer we get to August the second, frankly, the less leverage we have vis a vis our colleagues in the Senate and the White House."

# posted by

D. Ghirlandaio : 8:27 PM

As has been pointed out above, the July 31 date is what is key on this trade. Suggest August 3, 4, or 5 and the position might move dramatically upward. August 2 or shortly thereafter for Obama signing the legislation is the date the US markets are concerned about. Please also note that the Intrade probability of a Congressional agreement by July 31 was trading at 10% at about 3 pm today - so there was even more pessimism earlier.

# posted by

NIHer : 10:46 PM

DG:

Boehner is playing the "you better accept this deal or I will not be able to control the crazy tea party reps."

Indeed, it would not surprise me if the last couple days where Boehner very publicly worked to round up Tea Party votes for his bill was a kabuki dance for consumption by the Dems and the President.

# posted by

Bart DePalma : 9:30 AM

more info on what would result in a "default" for a CDS payout on ft.

Back of the envelope, if the contract is 90 bps and the potential payout is $1MM on a $10 MM contract, then the implied default probability is about 9%.

http://www.ft.com/intl/cms/s/0/3b6bf770-b860-11e0-b62b-00144feabdc0.html#axzz1TPU6Cs2w

# posted by

dwb : 10:34 AM

No Bart, Boehner is scared.

# posted by

D. Ghirlandaio : 10:36 AM

D. Ghirlandaio said...

No Bart, Boehner is scared.

Of what?

# posted by

Bart DePalma : 11:05 AM

Our yodeler, with this:

"Boehner is playing the 'you better accept this deal or I will not be able to control the crazy tea party reps.'"

provides a variation on Pres. Tricky Dick Nixon's efforts during his Vietnam days to convince the North Viets that he was crazy and would do just about anything.

With Bo(eh)ner, I can hear the late Patsy Cline in the background singing "Crazy." But Bo(eh)ner is off-key if he thinks he can control the "crazy tea party reps." Perhaps he isn't aware of the great influence of our "Crazy" yodeler.

# posted by

Shag from Brookline : 11:09 AM

He's scared of people even more stupid than you (and he's not too bright himself)

Jenny Beth Martin, a co-founder of the Tea Party Patriots

"Martin said default could be good for the country in the long-run, and said she looks to her own painful financial history as an example.

'As somebody who has gone through bankruptcy, I don't want to see our country into trouble that my family went through." she said. "I understand that means that you've got to sit there and look at: 'What can you do different? Can we sell anything? How can we get out of this mess?' And that's what our government needs to be looking at.' "

# posted by

D. Ghirlandaio : 12:13 PM

DG:

Boehner is scared of someone by the name of Jenny Martin? Well, so long as it is not Barack Obama or Harry Reid.

BTW, Jenny's erroneous comparison of national default to bankruptcy was previously offered by one or more professors here.

# posted by

Bart DePalma : 12:22 PM

-Boehner was asked if passage of his bill would help prevent the downgrade of the U.S. credit rating.
His response? "That is beyond my control"-

-Fox Senior VP Of Business News Cavuto: "I Would Welcome A Downgrade. ... I Think It Would Be The Pain From Which We Have A Gain"-

Not serious people.

# posted by

D. Ghirlandaio : 2:33 PM

DG:

The credit ratings are beyond Boehnor's control.

Boehner's piffle spending cuts barely qualify on easing off the pedal on the race track to insolvency - and even this pittance cannot get through our spendthrift government.

If it would not royally screw the economy, I wish the ratings agencies would reduce our rating to make our ruling class realize that it's last call for alcohol in their party with out money.

# posted by

Bart DePalma : 3:29 PM

You never cease to amaze me. You manifest some sort of blind nihilist optimism. The combination of self-admiration and incompetence is almost Rumsfeldian.

# posted by

D. Ghirlandaio : 4:25 PM

Cavuto's always been an idiot. He was even taken in by a representative of Steorn who promised a perpetual motion machine that would generate limitless energy without any sort of fuel.

# posted by

Isaac : 6:48 PM

Our yodeler is concerned with " ... our ruling class ... " presently but consider his efforts from 1/20/01 to 1/20/09, eight long years, enabling the then ruling class headed by Bush/Cheney that spent the Clinton/Gore surplus, gave us two wars, two tax cuts and the Great Recession. Has our yodeler sobered up with the Tea Party in a 12-step program? If so, he's missed a few steps.

# posted by

Shag from Brookline : 9:05 PM

A country with a fiat currency and debt denominated it said currency cannot become insolvent. It can experience hyperinflation, but that is a different than insolvency.

# posted by

Brad : 11:51 PM

BS. Your assumption presumes that people remain willing to accept that fiat currency. A fiat currency people won't take is just so much paper.

And, yes, I'm aware of legal tender laws. I simply believe it's possible for the government to make it's fiat currency so worthless that people will violate them. And they can only be enforced so long as they mostly don't have to be.

# posted by

Brett : 8:19 PM

You need to look up the definition of insolvent. Hint: it has nothing to do with the prospective ability to purchase goods and services.

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# posted by

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No roads are roads that Congress can pass an increase in the debt ceiling - no default - and the contract has not yet paid. For example, if you go late (midnight of August 1). Or, if you go through a temporary increase in lower (15.09 billion, up 0.806 billion from the current 14.294 billion) - will discuss another increase in September. 0806000000 through the Treasury would probably in September, October, possibly in this case, neither the contract in July or August would be paid - and the United States is by default.

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