Friday, September 26, 2008

Following The Case

Some thoughts:

US credit markets are in turmoil;

The government is forced to raise a lot of new money all at once;

US Treasuries, the primary vehicle for raising this money, are still well bought as a 'safety vehicle' and continue to be held (if anxiously) by our largest investors (China, Japan, et al);

A confidence crisis arises as to the US's ability to repay as credit conditions worsen and the Treasury requires significantly more money than is currently has;

In order to muster sufficient incentive to raise the new money, investors begin to demand higher reward for their risk;

Higher interest rates are offered for new and necessary debt, flooding the market with ever more supply of increasingly questionable quality;

Interest rates on US Treasuries increase rapidly.

Where are the holes in this? Clearly, this can be more specific, but this is a rough outline. Please poke.


  1. the hole in your theory is that you are not allowing for the yet uncreated law that prevents the shorting of US treasuries bonds in the USSRA (as well as all related derivatives)

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  3. Said law did not help nor protect WaMu. Less or no demand still leads to lower prices, with or without shorts. Funny though, the idea of a short ban on futures, options, and other derivatives effectively eliminates the market.


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