Get Rich Quick! Arbitrage Washington’s Debt Limit Dance

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The debt-limit debate is fascinating on many levels. It’s a big deal because a default by the U.S. government would create an unthinkable mess. It’s also a window into the Republican Party’s continuing efforts to defy reality, as it tries to convince itself that a default wouldn’t really matter, as well as President Obama’s difficulties negotiating with hostage-takers who aren’t sure of their ransom demands. And it will be a defining moment for House Speaker John Boehner, trapped between the Tea Party and the apocalypse.

But I’m more interested in the debt-limit debate as a get-rich-quick opportunity. This seems like a classic opening for arbitrage. Let’s face it: We basically know how this is going to play out.

Vice President Biden is overseeing negotiations over some kind of budget blueprint that will presumably have to include major spending cuts for Republicans to agree to raise the limit. The negotiations seem to be going surprisingly well, but anyone who’s paid any attention to Washington over the last few years knows that there’s no way a deal is going to happen until a crisis forces everyone’s hand. The risk of a default in three months or so doesn’t come close to qualifying as a crisis in Washington.

But we also know—at least I think we know—that at some point after that crisis there’s going to be a deal. At some point the crisis will become an emergency. The situation will become untenable. Then—and only then—the politicians will bite the bullet and cut a deal.

In other words: At some point this summer, markets are going to go haywire. And then they’re going to calm down. Isn’t there some way to sell high now, buy low when everyone freaks out, and then laugh all the way to the bank as sanity prevails?

I suppose it’s possible that all this is baked into the cake of current stock and bond prices. I’m not an expert, but I doubt it; I was alive in 2008, and markets don’t always seem to behave in a perfectly rational and efficient manner. It’s also possible that the Tea Party has gotten so strong that there actually won’t be a deal; if so, all the more reason to sell now.

Of course, you took my last gambling advice and invested six cents in Rick Santorum at 0.6% odds to win the GOP nomination, you’re now zero cents richer.  (I still think his stock is going to rise!) And I’m not even sure how to exploit this kind of general market freakout; I do know that the market can stay irrational longer than I can stay solvent.

But I also know that there’s going to be a lot of minute-by-minute coverage of the debt limit over the next three months, and you can probably save yourself a lot of time by skipping them, because we probably know how the story will end.

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