If the markets don't seem to be anticipating a bad outcome but you do, buying options seems to be a straightfoward way to mitigate the risk that you face.
Is there anything you would have done differently if you had known the date for the start of the 2008 recession with a +/- 2 week confidence interval, starting in two days?
If you know any significant economic event happens buying options seems to be the right way to proceed.
I would however be very cautionus. There are people on Wallstreet who have significant inside information on what goes on in Washington. Effectively you are saying that you understand the city better then them. How likely do you think that's true?
It is probably worthwhile to go through the list of sovereign defaults and see which ones appear to be similar and which individual risk mitigation measures were successful in retrospect.
I called the 2008 US recession. Fortunately I was too lazy/risk-averse to do anything about it, as my plan was to move assets into Euros.
If you want to debate [...] or how likely a US default actually is, please start a separate discussion.
This one is actually rather fundamental to this subject. Deciding whether, to what degree and in what manner to hedge against a risk depends rather heavily on how likely that risk is.
I consider this to be an indirect existential risk because if it kicks off a national or global recession, it will likely slow or halt research and philanthropic efforts at mitigating longer-term existential risks.
That a strange way to look at things. MIRI won't research FAI any slower through the federal funds shutdown. On the other hand military reserarchers who develop AI might be slowed down.
When it comes to research that poses an existential risk through nanotech, similar things are true. Government research produces a lot more existential risk than it solves.
Aha, finally found a replacement for InTrade for calibrating predictions of US economic/political events.
There is no real short-term crisis. As an economist I think that the big risk is that U.S. government spending continues to greatly increase but long term growth rates stay low and in 20-30 years the U.S. faces a political crisis over not being able to fund promised retirement benefits for the elderly, and responds by significantly increasing tax rates which causes negative economic growth.
Whew! It's over until February, and then we begin again.
I constructed a decision tree for whether or not to buy silver bullion, and sometime in the next few days I hope to clean it up and post it someplace for people to play with it and input their own estimates.
Can the Wiki handle XLS documents? Or is there some file repository that LW posts customarily link to?
Just the fact that people are now talking about the need to mitigate the risk of US default means that Treasuries are losing their status as the benchmark for the risk-free rate. Too late, too late...
As a general rule, holding dollar-denominated fixed rate debt is a great way to mitigate inflationary risks. Best source of that is a mortgage on real estate.
It will suck to be a bondholder or on a fixed income. It will suck to buy things from outside the US. It will suck to have a long commute or to travel lots (gas prices). Stocks will hurt, but not too bad. Real estate is solid. Fixed rate debt holders are laughing as the banks have to accept their wheelbarrow dollars.
US default as a risk to mitigate
If you mean the risk is that US will not pay out US treasury bonds then the obvious hedge is to short sell US treasury bonds.
There more I think about this affair the stranger it becomes.
You have people discussing about raising the debt limit but nobody seems to propose simply getting rid of the debt limit. If people really think that the debt limit crisis is that bad, why don't they propose to get rid of the concept of the debt limit?
A few ago there was the discussion about coining a 1 trillion dollar coin. Again if the debt limit crisis is that bad, why doesn't the president coin the coin and get done with it?
If powerful people would really think that this is really bad, I woul...
If another global crisis comes, it will certainly affect some places less than others. Depending on how bad it gets, I guess switching countries for a few years might be worth considering.
Germany might be a good bet - it weathered the 2008 crisis pretty well, is rapidly gaining financial power over other EU countries and isn't nearly as tied to the US as, say, the UK and China are. Everybody speaks English, too.
Update: Thanks everyone for the continuing thought-provoking discussion. I intend to post my decision spreadsheet, and still am looking for suggestions on where to do so. It might come in handy come February. A discussion that I find interesting has branched off on the topic of technological progress versus Malthusian Crunch, and I started a new article on that over here.
I would like to kick off a discussion about optimal strategies to prepare for the event that the US government fails to raise the debt ceiling before the US Treasury Department's "extraordinary measures" are exhausted, which is estimated to happen sometime between October 17th and mid-November.
This is a risk *caused* by politics, but my goal is to talk about bracing against the event itself if it happens, not the underlying politics. If you want to debate Obama-care, who is at fault, or how likely a US default actually is, please start a separate discussion.
I consider this to be an indirect existential risk because if it kicks off a national or global recession, it will likely slow or halt research and philanthropic efforts at mitigating longer-term existential risks.
Since there are obvious associations between unemployment/poverty and crime, civil unrest, and poor health, a global recession is likely to be to some extent a personal existential risk to those living in the United States or countries that have trade links with the United States.
I notice that the markets do not seem to be anticipating a bad outcome. But I heard one analyst advance the theory that investors simply don't believe the government can (his words) "be that stupid". I imagine there is more than a touch of availability bias as well-- breaching the debt ceiling might, even for fund managers who harbor no illusions about the wisdom of politicians, be up there with science-fictional scenarios like asteroid impact, peak oil, grey goo, global warming, and terrorist attacks. Moreover, there may be a dangerous feedback loop as the politicians in turn watch the stock indexes and conclude that "the market says there is nothing to worry about".
So, I would like to hear what folks who are making contingency plans are doing. Especially people who have training or experience in economics and finance. What do you think the closest parallels in 20th/21st century history are for what the worst case scenario for a US government default would be like? Is there anything you would have done differently if you had known the date for the start of the 2008 recession with a +/- 2 week confidence interval, starting in two days? Or, if you did call it ahead of time, what are you glad you did?