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That's what were looking at if the U.S. Defaults.

This is the analysis heard on the Nightly Business Report of PBS tonight.

One analysis even held out the possibility that the yields would actually drop (demand for U.S. Treasuries increasing) for the flight to safety if the world markets dropped with the loss of the AAA rating.

This, the bond trader said, would concern the longer term curves. .5% on long term rates would not be the drama everyone fears.

We are being had.  By Republicans, Democrats, the Chamber of Commerce, the shrill Chicken Littles held in thrall by the ratings agencies.  This is classic Shock Doctrine as Seneca Doane's diary points out so clearly. Combine the president's artificial deadline of August 2 with two hapless parties willing to play their roles to manufacture a debt ratings crisis.

More below the fold

But there's no guarantee that even if they go with the McConnell plan of raising the ceiling with no deal on cuts or tax reform that the ratings agencies STILL wouldn't lower the ratings to AA. This is well within the recent patterns the Eurozone and the ratings agencies. Whatever arrangements are made to renegotiate/bailout Greek debt by the authorities in Germany and France the bond markets will always weigh in with their own imprimatur and raise the vigorish and claim de facto defaults.

The temporary agreement would only raise the debt ceiling by $500 billion, enough to fund the government for six months, in order to give the ratings agencies another hard deadline where reform must be implemented, the firm predicted. The question on traders minds now is, will Standard and Poor’s buy it? - CNBC
Fitch rating agency: private sector involvement in Greece will put country’s bonds in default

The real threat to the system is that classic "credit event" concerning those who gamble in the CDS casino.  The swaps technically would have to pay off and that could have a cascading effect - possibly on certain banks and hedge funds - that poses the unlikely event of a credit crunch. Still, were talking gamblers and the unregulated by design derivatives contracts who would immediately suffer the consequences. But the design of the 595 trillion dollar derivatives scheme will always be ready as a threat over policy makers by the fiscal Kamikazes of Shock and Awe. Since the Dodd-Frank Bill for financial reform still doesn't address the over-the-counter derivatives markets and Wall Street has put a full court press against even cursory attempts to even monitor the trading, we will never be able to escape the ultimate mushroom cloud threat of a massive credit event whenever an "adult" needs to lecture.

Isn't it about time to finally be the real Adults and let the bond vigilantes, the ratings agencies know we're not going to be held hostage.  The legacy of the New Deal is a lot bigger than Fitch, Moodys and Standard and Poor's. I believe the party and/or the president who has the balls to let a technical default happen without the apocalyptic projections every media outlet and Left/Right Wing Noise Machine reduces the options down to - will ultimately expose the true emperor conducting with no clothes. This could even be what the Tea Party and Grover are counting on: A standing down and popular revolt over the financial puppet masters.

That would be the coup of the 21st Century. The end of the Rating Game in its current form. And a comeuppance for the fraud by the three agencies that allowed for the toxic MBS that caused Meltdown in 2007-08.

The Chinese word for "Crisis" is the same word for "Opportunity".  This, if handled sanely and squarely by the Democrats could conceivably turn the tables upon Wall Street and the Republicans looking to frighten Americans into delivering Social Security and Medicare/Medicaid as sacrifice to the Baal of the ratings gods. Or we could leave it to the Tea Party to take the credit if nothing happens when they deliberately walk away from the table. What a shame would that be to be punk'd again by teabaggers.

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Comment Preferences

  •  Tip Jar (8+ / 0-)


    by Aeolos on Fri Jul 22, 2011 at 06:04:44 PM PDT

  •  Aeolos - there will be no default (1+ / 0-)
    Recommended by:

    Even if there is no debt ceiling deal, the interest on the debt will be paid in a timely manner and all maturing Treasury securities will be redeemed at par. It is inconcievable that the President and Treasury Secretary would allow the US to default on its debt. There there will be fiscal chaos as the federal government struggles with 40% less cash than it needs to pay all of its obligations. However, the debt will be sound, the alternative would be catastrophic.

    "let's talk about that"

    by VClib on Fri Jul 22, 2011 at 06:15:10 PM PDT

    •  Default as a technical term would be decided (1+ / 0-)
      Recommended by:

      by the bond markets and ratings agencies.

      That is what is being bandied about the airwaves and internets when "default" is the direct consequence of not raising the debt limit.  These are contractual terms agreed upon in the swaps market as "credit events".

      So yes, interest payments or not, a default scenario would ensue.  The only question is if it would effect bond yields and a doomsday scenario of a hike in long term rates for the U.S. government down to consumers and businesses.

      I say we should call the bluff as the world's reserve currency and shelter.


      by Aeolos on Fri Jul 22, 2011 at 06:49:03 PM PDT

      [ Parent ]

      •  Default on the debt (0+ / 0-)

        Is when you don't make interest payments or fail to redeem a maturing security.  If no debt ceiling bill is passed the federal government will not be paying a lot of bills, so it will be defaulting on some of its obligations, but US will not be in default on its debt.

        "let's talk about that"

        by VClib on Fri Jul 22, 2011 at 09:58:01 PM PDT

        [ Parent ]

  •  There's a bit of history (1+ / 0-)
    Recommended by:

    on a technical US default.  Apparently happened during Carter's term and as I heard it, seemed more like an oversight than DC gridlock.  Anyway, it lasted about ten days and the public didn't even know about it.  That little lapse added 25-50 basis points to US debt from that point on.  Made me wonder if this whole charade isn't just a ploy to increase the bond yield for big investors.   The 2nd quarter sucked for Morgan Stanley and Goldman Sachs.

  •  You are dead wrong. (3+ / 0-)

    By LAW many institutions and funds can only invest in AAA rated bonds.  Naturally, Treasuries are popular.  A downgrade would have an INSTANT and EXTREME impact on trillions of assets in the country and the world.

    •  Explain the mechanics of this scenario. (0+ / 0-)

      What kind of "EXTREME impact" on these assets would ensue.

      A double A rating would only be superceded by Canada and France.  The trader on the Nightly Business Report clearly made the case of 25 - 50 points ON LONG TERM rates.


      by Aeolos on Fri Jul 22, 2011 at 07:18:11 PM PDT

      [ Parent ]

      •  These institutions would (1+ / 0-)
        Recommended by:
        A Voice

        have to instantly unload their Treasuries, by law.  They are not allowed to hold AA instruments only AAA.  The giant sucking sound you would hear is trillions of dollars being pulled out of the economy searching for a new home.   If you thought the previous liquidity crunch was bad...  

        •  This is partially true. (0+ / 0-)

          But the "instant" part is not.  Even the ratings agencies don't have that omnipotence.
          For the reason that they also must have insurance on those bonds.
          There are guarantees built into the system for such downgrades.  And a process of conversion with due diligence.

          This "instant" thing is another Chicken Little myth.  If the bond community deems U.S. Treasuries as the default safe haven relative to the rest of the world there will be no transferring by "Law" or not whatever the ratings agencies publish.


          by Aeolos on Fri Jul 22, 2011 at 07:44:33 PM PDT

          [ Parent ]

          •  No that's wrong. (0+ / 0-)

            It is LAW.  Yes LAW.  Some entities MUST hold only AAA instruments.  They would be FORCED, yes FORCED, to sell their treasuries.

            Losing the AAA rating would likely mean higher interest rates and the sale of treasury bonds by entities required to hold AAA securities

            The fact that the law legislates that certain ratings agencies have "special" recognition in this way was recognized as a chief deficiency that exacerbated the impact of the subprime mortgage mess.

            •  You are referring to the purchases of bonds. (0+ / 0-)

              The requirements of insurance and AAA agency ratings.
              Not the process of HOLDING downgraded investments.

              This does not happen INSTANTLY and BY LAW.  In some cases it requires CDS contracts to bridge the gaps and vagaries of the ratings game.

              You are portraying a scenario that's NEVER happened and never will in the real world.  Not with the reserve currency and ultimate safety of U.S. Treasuries whatever theoretical ratings are published.

              NO CE/CW. NO UNION BUSTING

              by Aeolos on Fri Jul 22, 2011 at 08:13:03 PM PDT

              [ Parent ]

              •  It has happened. It did happen. (0+ / 0-)

                It wasn't even long ago.

                •  No, the U.S. Treasury market has never experienced (0+ / 0-)

                  such a run out.

                  NO CE/CW. NO UNION BUSTING

                  by Aeolos on Fri Jul 22, 2011 at 08:18:33 PM PDT

                  [ Parent ]

                  •  Don't be obtuse. I'm talking about (0+ / 0-)

                    subprime meltdown.  Anyway.. you're not interested in understanding, I can see that.

                    •  I am interested but I can't see the panic (0+ / 0-)

                      Instant or not that will sweep the bond traders.  Not after listening to this gentleman on PBS.

                      And I thought you were referring to bond trading.  Really.

                      In the meltdown the money all went to the global safe haven:
                      U.S. Treasuries.

                      NO CE/CW. NO UNION BUSTING

                      by Aeolos on Fri Jul 22, 2011 at 08:28:05 PM PDT

                      [ Parent ]

                      •  This is not right. (1+ / 0-)
                        Recommended by:
                        A Voice
                        In the meltdown the money all went to the global safe haven:  U.S. Treasuries.

                        Pensions and banks and other entities required to hold all, or a % of, AAA instruments suddenly were faced with replacing these downgraded CDOs with something that was AAA rated.

                        That meant either selling them and buying something else or just coming up with lots of cash to meet % requirements.   Either scenario required coming up with lots of cash which everyone had to do at the same time.  There were other cascading effects as well, of course, but this is proverbial snowball rolling down-hill.

                        This situation is similar although shallower but broader.  All of these institutions will need to come up with cash suddenly and immediately to satisfy their holding requirements.  Yes, in this case the Treasuries will maintain a value and be much more price-able than the CDOs were but there will still be a cash gap on a wide-scale.  We will, at least, immediately be thrown into recession again.


                        ...  Wells Fargo "executives said they had been keeping close tabs on the bond market and making sure they had ample cash on hand." The Times report adds: "[E]ven if a deal is reached in Washington, some in the industry fear that the dickering has already harmed the country's market credibility."

                        Hedge funds and venture capital firms—major investors in new and growing businesses—have also changed their ways, just in case. George Soros' $25.5 billion Quantum Endowment Fund has pulled back trading and is now holding a whopping 75 percent of its assets in cash—just hanging onto them, not investing them, not using them to help the economy grow. Why? In part the debt crisis in Europe, in part China's tamping down on inflation, and in part the "debate over the U.S. debt ceiling," Bloomberg reports. Many other money managers, like the giant asset manager BlackRock, are doing the same.

                        •  Credit Crunch (1+ / 0-)
                          Recommended by:
                          A Voice

                          U.S. Treasuries were golden and the ability to float the huge debt is a result of that fact. So there will be no run on Treasuries now or in the near future.

                          You may be right about one aspect of the credit crunch and the unavailability of credit for capital requirements.  But we aren't in a credit crunch currently.  There will be plenty of cash looking for a home.  U.S. Treasuries with very competitive yield if the traders want to ratchet a default premium.

                          No the process will balance, default or not.

                          NO CE/CW. NO UNION BUSTING

                          by Aeolos on Fri Jul 22, 2011 at 09:11:06 PM PDT

                          [ Parent ]

                          •  Wealth will vanish on Aug 3rd. (1+ / 0-)
                            Recommended by:
                            A Voice

                            The cash shortage will be made up by deleveraging.  Deleveraging will squeeze credit.  Squeezing credit will slow the economy.

                            You may disagree on scale but this will happen and this process will begin on August 3rd.

                          •  Not sure why bond traders will deleverage (0+ / 0-)

                            with such attractive spreads at 25-60 basis point premiums.
                            Money is to be made.
                            It will squeeze and slow economic activity for sure when rates rise for an extended period but there will not be an INSTANT knock on collapse of the market.

                            AA will be the new normal and academic.

                            NO CE/CW. NO UNION BUSTING

                            by Aeolos on Fri Jul 22, 2011 at 09:43:55 PM PDT

                            [ Parent ]

                          •  The bond traders are irrelevant.. (0+ / 0-)

                            I can't even understand why you keep coming back to that.  Bond traders don't have capital requirements.

                          •  I'd think that traders would know best (0+ / 0-)

                            what the consequences to their business would be in default.

                            Capital requirement of cash poor institutions aren't at issue.

                            Rates are.  25-50 basis points isn't big drama.

                            NO CE/CW. NO UNION BUSTING

                            by Aeolos on Fri Jul 22, 2011 at 10:40:39 PM PDT

                            [ Parent ]

                          •  Really.. No. (0+ / 0-)
                            Capital requirement of cash poor institutions aren't at issue.

                            Yes, this is exactly the issue.   Bond traders would only care about the value of the Treasury which won't decline a lot.  That's NOT a problem.  Bond traders don't have capital requirements so they don't care that the Treasury is not AAA anymore as long as it's value is too severely impacted.  

                            However, to a pension fund, a Treasury that isn't AAA is worth bupkus.  They need to get rid of it and replace it with something that is AAA.  They will lose money on this.  They will need to come up with cash.   And this will happen on a grand scale.  Institutions that don't have AAA requirements will be happy to buy Treasuries for less.  The net effect of the liquidation will be a liquidity crunch sucking liquidity out of the economy causing a slowdown.

                            Seriously, bond traders are irrelevant.  The value decline of the Treasury is largely irrelevant.  Stop bringing it up because it's meaningless.

                          •  Think of it this way then: (0+ / 0-)

                            There won't be any better bonds to hold that Treasuries, abstract rating or not.

                            It will still be the only game in town relative to what is risky across the globe - in Europe especially.

                            No one's going anywhere. This is a political crisis that's taken hold concerning "austerity" measures.  Classic Shock Doctrine.

                            Let the U.S. default and you blow the market's false apocalyptic narrative meant to spur the Tea Party into hostage taking.

                            NO CE/CW. NO UNION BUSTING

                            by Aeolos on Sat Jul 23, 2011 at 11:48:16 AM PDT

                            [ Parent ]

                •  Plus you should understand that the bond trader (0+ / 0-)

                  on PBS tonight explained he thinks that treasuries will actually be MORE attractive for safety reasons.

                  No. Law or no law you won't see fund managers transferring their holdings under such uncertainty.

                  NO CE/CW. NO UNION BUSTING

                  by Aeolos on Fri Jul 22, 2011 at 08:22:15 PM PDT

                  [ Parent ]

        •  Plus there is a strong likelyhood that (1+ / 0-)
          Recommended by:
          A Voice

          the ratings will be lowered anyhoo if the McConnell approach is resorted to.

          So in your scenario "INSTANT" rate-geddon would result with or without a deal.  What kind of insanity is that.  Are we to be held hostage to it for the rest of the decade?  Instant oblivion.

          The bond traders don't think so. 25 -50 basis points.


          by Aeolos on Fri Jul 22, 2011 at 08:06:47 PM PDT

          [ Parent ]

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