Not So Merry-Go-Round

From the Dartblog: “According to data from Markit printed by WSJ, on August 1, it cost $15,000 to insure $10 million of US Treasuries against default but only $7,000 for German sovereign debt. That number has more than doubled to $32,000 for US debt but Germany’s has spiked to $33,000. The UK trails in at $58,000 and Italy at $109,000.”

From the above it is clear that the credit default swap (CDS) market is indeed existential. If one has to insure one’s purchase of an U.S. Treasury obligation against default, then what happens if such an event does occur. Clearly, since for each billion dollars of Treasury obligation, there is probably $10 billion of CDSs written against it, such writers of these CDSs will likely again be flocking to the U.S. Treasury for a bailout since most such insurers would be far too undercapitalized to make good on the bets they had made (like AIG). However, since it would have been the government itself that had defaulted, where are they (we) going to get the moolah then to perform such bailouts? And, if we stupidly print this money, wouldn’t this just snowball into more U.S. Treasury defaulting?