Prediction Markets on the Debt Ceiling, U.S. Credit Downgrade

Over at Intrade, there are two “hot” markets involving the odds that Congress will raise the U.S. debt ceiling.

– Congress to approve increase in U.S. debt ceiling before midnight on July 31, 2011: 40% (It was 65% a month ago)

– Congress to approve increase in U.S. debt ceiling before midnight Aug. 31, 2011: 75% (It was 85% a month ago)

And at Irish bookmaker, here is the line on a Moody’s downgrade:

Will Moody’s downgrade the U.S.?

-Yes: 9/2

-No: 1/8


Likelihood that the government will sink further into debt. 100%

Likelihood that Obama will blame everone else for whatever bad happens. 1,000%

Joshua Northey

Why you would single out Obama when he is a perfectly pedestrian and normal part of the two party apparatus that has been running up this debt for decades is beyond me. People demonize him as though he isn't just some normal run of the mill Democrat.

Wake up! Neither party is interested in anything other than perpetuating their own power. Take off the partisan blinders and think for yourself for 5 seconds.


Meanwhile, the 10 year treasury is yielding 2.9%. Which is more reliable, the bond market or the betting markets you mention?


Given the amount of debt we've taken on, and the lack of tax revenues to repay it, I'd have to go with the betting markets over the bond market.


I do not understand how the rating agencies have kept the US with a triple-A rating. That rating means that principal and interest are totally, positively, certainly going to be paid exactly when owed, absolutely no risk at all. That's what the rating agencies say in their literature. These circumstances are completely inaccurate right now -- a quick read of any major newspaper, a listen to a news program on TV (even Fox) will tell you that there is a very non-zero chance of default. In the regular world, loss of triple-A doesn't require an actual default, just an enhanced chance of it. In that world, the rating below triple-A is not D (default) but something in between. The US has been given a gift. Will Congress have the sense to take it?

Caleb b

Uh, the bond market is being skewed by the FED, so I don't think your argument holds water. The FED could just buy all the 10yr notes and then default to themselves. Yields would be zero.

caleb b

"Meanwhile, the 10 year treasury is yielding 2.9%. Which is more reliable, the bond market or the betting markets you mention?"

This seems to imply that the current market is a good predictor of the future. I'd argue that it is not, as the current market only uses known data.

Put another way, 10 days before Lehman failed, its stock was trading at $16 a share. I don't think it matters where the 10yr note is trading today.


The credit rating agencies should be given little attention. From economist David McWilliams:

"Like the whole economics and finance industry, the acid test of credibility should be how they answer the simple question: 'Where were you in the boom?'

...In the US sub-prime mortgage disaster, the rating agencies were paid by the banks to rate the junk they were selling as triple A.

In reality, some of the assets in this AAA toxic cocktail were worthless. Subprime debt, loans to people who had neither means nor intention of repaying money, were packaged with reliable securities, then given gilt-edged ratings by agencies in the pay of the banks. In the Irish case, our banks – just when they were blowing their balance sheets – were rated AAA by the same rating agencies who are now telling us they can rate us.... They are simply chasing the market. They are always last to know."

It astonishes me that the agencies who were raving about Ireland during the bubble years when the economy was built on sand, are now denouncing it after several years of necessary stabilising, savage budget cuts, falling labour costs, booming exports and the first steps towards recovery. They seem incapable of predicting anything, but simply blunder after the headlines.