Many call the debt ceiling situation going wrong a black swan event. That is totally misleading though. Black Swans are unpredictable events. US failing to raise the debt ceiling, “just because they always have raised it”, is not something “impossible” for the ones having done their homework, just like the Uprisings in the MENA region earlier this year. Maybe the debt ceiling is just another neon swan?
For Taleb’s Black Swan work, click here.
You’ve heard of black swans—events that are unthinkably rare, immensely important, and as unpredictable in advance as they are inevitable in hindsight. Now, with no one ruling out a default or downgrade of U.S. Treasury debt, investors face a new kind of threat: what we will call the neon swan, an event that is unthinkably rare, immensely important and blindingly obvious.
The politicians in Washington have a couple weeks to forestall a disaster that has begun to seem like a certainty. Investors everywhere are perfectly aware of the consequences if Congress and the Obama administration can’t strike a deal: The U.S. is likely to lose its privileged triple-A credit rating, and corporate bonds and stocks alike could plummet in response.
As Nassim Nicholas Taleb’s bestseller “The Black Swan” made clear, the human mind is poorly equipped to prepare us for rare, important and unpredictable events. But maybe our minds—and our markets—aren’t very well equipped to protect us against neon swans, either.
Continue the NYT article.
With the Debt Ceiling Trade going into Expiration, somebody needs to start hedging the positions. Neither side wants a Default, but the stakes are high. Game Theory at it’s best. The New Yorker reports;
It’s interesting that the debt-crisis talks are happening concurrently with baseball’s trading deadline. As every fan of the sport knows, there’s always a flurry of transactions right at the annual 4 P.M. deadline on July 31st. Why? Game theory. A trade may benefit both teams, but each also believes that holding out may lead to better terms. Eventually, time runs out. When the Red Sox traded away Manny Ramirez, they filed the paperwork at 3:59 P.M.
But perhaps baseball, which is essentially meaningless, is the wrong analogy for Washington’s current self-inflicted crisis. Maybe a more parallel two-party negotiation is the Cuban missile crisis. The stakes are lower now, of course. Potential default does not equal potential planetary obliteration. But the game theory has more than a bit in common.
Read more here.
“…raising the debt ceiling does not allow Congress to spend more money. It simply gives our country the ability to pay the bills that Congress has already racked up. In the past, raising the debt ceiling was routine. Since the 1950s, Congress has always passed it, and every President has signed it. President Reagan did it 18 times. George W. Bush did it seven times. And we have to do it by next Tuesday, August 2nd, or else we won’t be able to pay all of our bills.”
– PRESIDENT BARACK OBAMA, JULY 2011
And we all know what our Mothers said to us while growing up. “just because They (your friends) all do, doesn’t mean you should do it, nor is it right”
This week’s Must read hmmm report, check out the link, Hmmm Jul 31 2011
Seven “what if’” the debt ceiling is not resolved, and the great USA starts defaulting on it’s debt. Before reading, consider the interest rate moving back up to a more normal level, and the little growth that is left in the Economy, will go to pay higher interest payments. Welcome to the real gridlock.
Some questions if US is to Default. For answers and further reading, click here.
1. Should I be worried that I won’t receive my Social Security benefit in August?
2. What if I just filed for benefits, or plan to file next month? Could I lose my benefits in the event of a government default?
3. Will interest rates on mortgages, car loans, student loans and credit cards rise?
4. What’s the outlook for the U.S. dollar?
5. What’s the outlook for U.S. Treasuries?
6. Will we still pay our soldiers?
7. Is there an upside to higher interest rates?