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Treasury rates are almost absurdly low right now, so we can clearly agree that there is very little perception of risk that the US will default. That's why it m

Treasury rates are almost absurdly low right now, so we can clearly agree that there is very little perception of risk that the US will default. That's why it makes a great example of this phenomenon; people will look back and see all the (in retrospect) obvious signs of a coming default and wonder why it wasn't obvious now. I would hope the structural differences between the US situation in 1945 and now would be obvious - exporter vs importer, young vs old, short term debt (the war) vs long term (SS and Medicare, plus maintaining an ongoing worldwide military presence). And we don't currently have the advantage that every possible economic competitor of ours was recently carpet bombed and utterly drained by years of total war, which certainly didn't hurt our exports. Adding for clarity: I don't currently believe either a default or major coastal flooding is inevitable or unstoppable, I just think there is substantially more risk associated with it than is generally perceived. Ironically, the perception of little risk can help make such events more likely, because after all there is little point wasting lots of effort trying to prevent something that probably won't happen, right?

jessriedel 16y ago
I think then your claim is that the true risk and the perception of risk are very different, not that default is necessarily likely (i.e. > 50%). If you were really confident that default was likely within 20 years, you could make an awful lot of money shorting T-bonds (or something).
- randombit 16y ago
  You can buy credit default swaps in T-bills, so if the US defaulted you could make a nice return - if you think you can find a counterparty in the form of a large insurance company or bank who would actually survive a US default, which seems unlikely. An article in the Economist (IIRC) made the comment that these CDS's had best be denominated in Kalashnikovs and cans of spam.

jessriedel 16y ago

I think then your claim is that the true risk and the perception of risk are very different, not that default is necessarily likely (i.e. > 50%). If you were really confident that default was likely within 20 years, you could make an awful lot of money shorting T-bonds (or something).

randombit 16y ago
You can buy credit default swaps in T-bills, so if the US defaulted you could make a nice return - if you think you can find a counterparty in the form of a large insurance company or bank who would actually survive a US default, which seems unlikely. An article in the Economist (IIRC) made the comment that these CDS's had best be denominated in Kalashnikovs and cans of spam.