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TPM Reader MM doesn’t think people see what’s coming …

I’m not sure, after reading 9 reader responses, that people are fully aware of the consequences of a debt default, or even avoiding default by issuing bonds to fight over in court later, issuing console bonds, minting the coin or prioritizing payments.

The thing about the bond market that is very hard to understand is that everything is benchmarked to the 10 and 30 year Treasury. That’s just how prices are set. You want a car loan? It’s priced at what the lender feels they have to be paid to not just leave the money in risk free Treasury bonds. That these bonds are risk free is so ingrained it’s why Silicon Valley Bank failed. They put all their money in long-dated Treasury bonds and thought they were good. And they would have been, if everybody hadn’t wanted their money at once.

Anything that calls Treasury risk into question screws up the benchmarking and causes a credit freeze because lenders will not know how to price a student loan, a mortgage loan or even a payday loan. They will stop lending and hoard cash or commodities. And big companies that use short term credit to make payroll while they collect on long-term receivables, will fall short.

Not to mention that even payment prioritization could trigger credit default swaps that will put banks and insurance companies on the hook for huge payments and if those cause a major financial institution to fail, there is no government backstop if federal spending is prioritized or frozen.

We could have a Depression. If there is a default, even technically, it might not be as simple as “economy goes back to normal when it’s fixed’ if major institutions die during the turmoil.

I wonder if my imagination is just running wild or if Biden sees things that way.

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