Some days, it feels like the same news circulates 'round-and-'round. My interest is always piqued when two thoughtful sources, from two different spots on the planet, are discussing the same locally occurring phenomenon .
First, Jesse discusses the drop in price/rise in yield of US Treasury securities.
Foreign central banks were noticeably light buyers, much preferring the shorter durations like the three year.
Primary Dealers took a big chunk of the offering. Current trends suggest that Ben will take it off their hands through monetization.
The Fed will be under signficant pressure to buy the bonds as the bias to the short end of the curve creates imbalances that precipitate a funding crisis, and a possible currency crisis, at the Treasury in 2010 if this trend continues. It is unlikely that they will raise rates when monetization is a viable, if not preferred, option.
Short form--the world is getting cold feet about the US's situation, and our ability to produce any manner of prudent leadership to set things straight. The Beloved Leader's address on the economy, where he declared that we will have to borrow and spend our way out the mess created by borrowing and spending, certainly did not help.
The BBC's ever-droll Robert Peston tells the same tale about the UK gilt.
There's an unmistakeable smell of the 1970s about finance, politics and economics: the City recovering from a banking crisis; a super-tax on wealthy bankers; fears that international investors will stop lending to the British government; excitable chatter about the likelihood of a hung parliament. All we need now is a power cut and I would swear I had been transported back to my teens (if only).
Hmm...the same approach pursued in both countries isn't working, and the marketplace is letting both governments know. They are walking away from the auction, or sitting on their hands if they remain.
In late October 2007, my bride and I made one of our jaunts to the Lawrenceburg Antique Auction, in a county seat just north of the Alabama border. It has always been a wonderful event, and we've furnished much of the house from it. Vast amounts of wonderful pieces for sale, big crowds, high-rolling bidders--great entertainment, even if we didn't buy much.
October 2007 was different. Parking was easy to find. We walked in to a half-empty room, and gloom was in the air. The bidders had not shown up, and the ones there were sitting on their hands. Many times the opening was met with stone silence, followed by a lower opening, followed by silence. Fabulous pieces were selling for 30% of what they would have purchased a year earlier. We lusted after them, but could not think of where they could fit in our small house. We ended up buying several small tables, which we did need, enough to fill the pick-up truck, and paid under $300 for the lot of them. I honestly felt badly for the auctioneer. A few times, we and other bidders would raise the paddle just to keep the proceedings underway. We knew then that something was seriously amiss in the economy.
I wonder if we are now on the front end of the same scenario with US and UK government debt. Congress and Parliament will not restrain themselves, so the marketplace called upon to keep it all afloat has begun to demand interest rates concomitant with the risk they face.
Seriously. Would you bet much money on a government running these sorts of deficits, and occupying its time on how to expand spending via health-care, environmental regulation, stimulus packages, bailouts of both industries and states?
And a war thrown in for good measure, just to keep it interesting.
It's not the economy, stupid, to contradict Bill Clinton's Ragin' Cajun. It's the culture, the one that thinks all of the good things of life should fall into our hands like ripe fruit from the tree, because, well...it's us. We deserve it!
At least we think so. The world is perhaps beginning to disagree with us.
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