Today In Silver

U.S. Treasury Credit-Default Swaps Increase to Record, CMA Says
September 9, 2008
Bloomberg

Credit default swaps are like an insurance policy for defaults on debt. Basically, its like mortgage insurance except the swaps can be bought and sold by anyone, not just the lender or borrower of the reference debt security. Why would people deal in credit default swaps if they aren’t parties to the credit instruments underlying the contract? Why, it’s for the speculation, of course.

To tell you the truth, I never paid attention to the cost of insurance to protect U.S. Treasury securities since the concept is pretty silly. How the heck is any private entity going to pay off credit default swaps that have been triggered because the U.S. government itself has defaulted on its obligations? Does anybody think this would happen in a vacuum?

In any case, a group called CMA Datavision reports that 5-year credit default swaps on U.S. Treasuries have jumped to 18 basis points this week from a level of 6 basis points in April. Each basis point of a credit default swap is 1,000 Euros on 10 million Euros of securities so that means “Treasury insurance” reduces yield by 0.18%. The yield on 5 year Treasuries is currently 2.91% so the insured yield is really only 2.73%. The sad part is that German bonds apparently cost 8 basis points to insure currently and Japanese bonds (yielding near zero percent interest) cost 16.5 basis points. So much for U.S. Treasuries being “risk free”!

What does this all mean? For one, that people are actively placing bets on a debt default by the U.S. government in the next 5 years! The cost of the bet is tiny but the payoff is enormous. Unfortunately for prospective winners, the chance that a payoff will ever be made in the event the U.S. government defaults is extremely remote. But of course all of us here know about an insurance policy that is only a bit more expensive yet is virtually guaranteed to pay off if the U.S. government reneges on its obligations. Should we tell these poor fools who are buying credit default swaps on U.S. Treasuries? Nah, I say let them figure it out.

In the meantime, let’s just muse about how many basis points the credit default swaps on Treasuries must rise before we get that impeachment of “the very credibility of the Federal Reserve and the U.S. Treasury” as I recently mentioned.

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Cut Off Your Tail to Save My Face?[PDF]
Prof. Antal Fekete
August 30, 2008

The good Professor reprints his introduction to Ferdinand Lips’ book “Gold Wars”. I find this to be one of his more memorable insights into the gold standard and its present status in the world monetary system:

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“. . . governments have, correctly, identified gold as the only antidote in the hands of the individual against their effors to build the Tower of Babel of irredeemable debt . . . According to the Bible man had become so conceited as to challenge God by proposing to build a tower that was to reach to High Heaven. God?s punishment for the temerity was to confuse the tongues of nations . . The Biblical story may be interpreted allegorically as an admonition not to challenge God by attempting to build a tower of irredeemable debt that is to reach to High Heaven . . . Currencies of nations have been confused. The tower can never be completed for lack of compatibility among various means of payment.”

The remainder of this piece is a discussion of the Basis, which will be the subject of?the Fifth — but hopefully not –?Last Session of Gold Standard University Live in Canberra, Australia from November 11-14, 2008. The title of the session is “Primer on the Gold Basis”, which of course is right up my alley (actually, some of the past GSUL attendees can probably teach such a Primer better than I can at this point since my head is buried deep in the details!)

If I knew that?some of you?are rearing to?go, and specifically would like to hear me speak about?the basis at an advanced level,?that would help me?resolve to?cancel my other personal and business commitments so that I can make it to this very special, once-in-a-lifetime?event. I’ll try to put together a preliminary course outline over the next few days?to?share with you, but in the meantime please e-mail me with your thoughts and interest.?By the way, the basis could very well be the most important signal to watch in the silver and gold markets during?the next few weeks and months, so this is all very timely.

silverax Monetary Links