Intriguing behaviour as crisis is averted

Most people were happy to think the US's political problems were short term.

So that's that. We won't have to waste any more time thinking about the fight over United States government funding until early January, or the US debt ceiling deadline until early February.

The first half of the summer is ours to watch Australia fail to retake the Ashes.

But pushing the relief aside, it was interesting to watch in the last few weeks how financial markets work their way through potential crises.

The different behaviours were all on display: the complicated web of rules, the local and foreign influence peddlers, the assumptions, bets and hedges that global traders were happy to make.

Reserve Bank and Treasury officials were busy reassuring us. They pointed out that if the US missed its debt ceiling deadline and began to default on its bond repayments, then it would have been only a technical default.

Why split the difference? Because the US government, which sits at the centre of the global financial system, would still be able to pay its debts. It's just that it would be unwilling to do so for the moment, which is a significant point. (One official said that if it were an actual default, then we should all be heading for the bunker.)

Traders seemed happy with that explanation and assuming that the worst wasn't going to happen. Investors agreed, and remained relatively sanguine.

The Australian Securities Exchange, which had been running stress tests to prepare for a shock of volatility, noted the day before the debt ceiling deadline that its volatility index was sitting at just 14.7 points, more than 32 per cent lower than in June, standing nowhere near the global financial crisis peak of 66.72.

So the equity market was showing that most people were happy to think the US's political problems were only short term, and that the US government would soon return to its money-printing ways.

And that's exactly what happened.

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