The Probability of Something Bad Happening

We are presented with this decision in finance a lot. There is a small probability of something bad happening and a large probability that everything will be fine. What do you do to insure yourself against something bad happening? Because there is no such thing as a free lunch. Insurance costs money.

I am talking about the debt ceiling. I am very alert to the probability that the US will default on its debt. There is a small probability of that happening—but that probability is higher than at any point in history. And what I think is interesting about this is that people are sleepwalking through it, saying that it always works out in the end, when, in fact, it does not have to always work out in the end.

Let me frame this for you. The Fed hiked interest rates a lot, and people were dissatisfied with the yields they were getting in savings accounts and piled into T-bills, which were getting higher yields. Unfortunately, T-bills are the worst place to be if you think there is any likelihood that the government will default.

I can tell you that I personally have removed my money from money market funds, and I am holding it in cash until the debt ceiling is resolved. I am costing myself a little bit in terms of interest but gaining peace of mind. And if you know my shtick about personal finance, you know that I always do the thing that results in less stress. I don’t want to be up late at night on May 31, refreshing the browser on my laptop seeing if my T-bills are going to mature at par.

The statistical probability is higher than ever. US 1-year CDs are implying about a 4% probability of default. As I write, four-week bills are up about 13 basis points on the day. The market is taking this seriously, even if you are not.