I found this on an interesting econ blog tonight, in the comments section: Alex Zaffron says: September 28, 2013 at 1:44 am Jared-As an equity trader, I’m offering an analysis from my perspective, condensing what you’ve been trying to tell folks,but just doesn’t seem to register with some. If it’s at all helpful, please use any of it. A lesson in markets to congress: The core irony, here, is that these people, who elevate ‘The Market’ to something approaching a perfect deity, clearly have no idea, or simply don’t care, how markets work. Markets are simply arenas of exchange. For them to function, all participants must have some level of confidence in the institutions under which they function, and the media of exchange underpinned by those institutions–In this case, money, and credit. While damaging, a government shutdown, in and of itself, is not catastrophic. Potential debt default is. What these people fail to recognize, is that markets do not simply react to events, but move in anticipation of them. And violent movements, once begun, are very difficult, if impossible, to arrest. Why? Because despite Milton Friedman’s endlessly, empirically debunked theory of ‘rational, efficient’ markets, they are anything but. They are guided by emotion–greed, and fear. And fear is by far the most explosive: That’s why cataclysmic market events are called ‘panics’. This is why congressional republicans’ game of ‘debt ceiling mumbletypeg’ is likely to blow up before the actual date of ‘technical default’–the day, or hour, that the Federal government will have to ‘prioritize’–which in reality means, to decide which obligations not to pay. Let’s be clear: servicing the debt is not the only obligation that throws the nation into default. Every dollar allocated by congressional action is a legal obligation to pay. Period. Failure to do so, is a default. When markets begin to believe that the United States government may not meet these obligations, credit will begin to freeze, stymying the cash flow to institutions large and small, stopping their ability to do business. Equity markets will crash as investors pull funds, triggering margin calls which will accelerate liquidation (lesson: Trillions in equity are held on ‘margin’-stocks, commodities and debt instruments bought on credit–When those equities decline in value, owners are required to liquidate to meet ‘margin’ obligations.). Then come the ‘shorts’: Short sellers are a sociopathic breed who thrive on destruction. Without going into the mechanics, shorts bet on the failure of companies and economies and profit from decline. For the shorts, it’s a zero-sum game: they only profit if someone else loses. In a decline, shorts pile in, accelerating the process. The central point, is that this cascade of events may begin any day between today, and the date of actual default. Because, once again, it’s all about confidence. And if the largest single economic entity in the world, the United States Government, arrives in a position where it’s obligations are only as good as a congress that may decide to welch on their own obligations because they don’t like what previous members of their own institution have passed as a matter of law, markets will determine that institution unreliable. This will kick off a panic. And, once begun, as illustrated above, is likely to be impossible to stop before trillions of wealth, in equity value, real estate value, and any other assets denominated in the dollar, are destroyed. And, if goldbugs think they’re gonna escape, they are sadly mistaken: As the currency becomes scarce through credit freeze, and the deflationary cycle it kicks off, all commodities will tank. Congress is running out of time to forestall this catastrophe. Because it is not in their control when markets decide that their actions make them an unreliable debtor. And once the markets do, there is no one, and nothing that can stop it.
Posted on: Fri, 04 Oct 2013 07:16:35 +0000
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