QOTD: Felix on the already-default

Felix Salmon at Reuters:

The harm done to the global financial system by a Treasury debt default would not be caused by cash losses to bond investors. If you needed that interest payment, you could always just sell your Treasury bill instead, for an amount extremely close to the total principal and interest due. Rather, the harm done would be a function of the way in which the Treasury market is the risk-free vaseline which greases the entire financial system. If Treasury payments can’t be trusted entirely, then not only do all risk instruments need to be repriced, but so does the most basic counterparty risk of all. The US government, in one form or another, is a counterparty to every single financial player in the world. Its payments have to be certain, or else the whole house of cards risks collapsing — starting with the multi-trillion-dollar interest-rate derivatives market, and moving rapidly from there.

To the degree to which financial institutions are already avoiding treasury bonds that mature in October and November, Felix argues that the default has already gotten underway. The distrust has begun – and trust is the only thing holding the entire global financial system together, at the end of the day.

If these dumb sonofabitches really take us over the edge and into catastrophe because of a health care law that has already been passed in Congress and upheld at the Supreme Court, they should probably be tried for a crime against the nation.


The default has already begun (Reuters)

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