Free Markets, Free People
What if the Treasury held a bond auction and nobody came? After today, that’s not a rhetorical question.
Weak demand at a Treasury bond auction touched off worries in the stock market Thursday about the government’s ability to raise funds to fight the recession.
The government had to pay greater interest than expected in a sale of 30-year Treasurys. That is worrisome to traders because it could signal that it will become harder for Washington to finance its ambitious economic recovery plans. The higher interest rates also could push up costs for borrowing in areas like mortgages.
We are moving closer to what I warned about in March, after the UK had a failed auction of 15-year gilts. Apparently, the Chinese didn’t turn out in force today. They did however, continue talking about a new reserve currency–one that isn’t the US Dollar. And apparently they’ve been doing more than talking about it.
As we learned last week, the Chinese–who haven’t announced anything about their gold holdings since 2003–casually dropped an announcement that they’d nearly doubled their gold holdings from 19 million to 34 million ounces. Moreover, this gold, which had previously been kept for foreign trade in an account at the State Administration of Foreign Exchange, has now been transferred to the bank of China, as part the country’s monetary reserves.
I don’t think they’re all that keen on lending us money any more.
This is important because it indicates the extent to which gold is being rehabilitated as a monetary reserve asset, not only by the Chinese monetary authorities but by central bankers around the world. It has been clear that gold was being restored as a more important part of the world’s financial system, with rising investment demand over the past nine years. The Chinese government’s decision to say that this gold belongs in its monetary reserves emphasizes that monetary authorities also are looking at gold with greater interest than they have since the 1960s.
There’s a new reserve currency in town, and it’s yellow and shiny. What it isn’t is green with pictures of dead presidents on it. Maybe the Fed’s doubling of
M2 the monetary base over the last eight months was a bit…intemperate.
So, the key take-aways here:
1) Higher interest rates possible as auctions fail to find bidders at lower yields.
2) Billions and billions of dollars floating around, with no place to go but back home. “Wouldn’t you like to wear $3,000 suits and smoke $75 cigars? I know I would.”
But, we probably shouldn’t worry. As Glenn Reynolds says, “The country is in the best of hands.”
I am enjoying the spin on this – a $3.4 trillion dollar budget offset by $17 billion in “savings”. And what does the administration want you concentrating on? That pittance of a savings.
Now I welcome any program eliminations and reductions, don’t get me wrong, but my goodness, $17 billion in relation to the spending that’s being done with the budget and outside the budget for “stimulus” and bailouts makes these “savings” simply laughable. They’re diversionary bait. They’re larger than the 100 million Obama ordered previously only because of the derision with which that cut was met. In the context of total spending, this ‘savings’ is comparable.
Even liberals aren’t fooled for the most part. Isabel Sawhill, who was a senior official in the Clinton budget office and now with the Brookings Institute finds little to be excited about:
“This is a good government exercise without much prospect of putting a significant dent in spending.”
Translation: “This is all for show. It demonstrates no committment to smaller government or less spending. Its purpose is to dampen criticism of the huge spending increases”.
As I understand it, half the cuts come from Defense spending and the other half from discretionary spending. Again the politics of these cuts is smart if not transparent. If you’re going to cut defense, something the right is passionate about, you have to even that out by eliminating something the left likes. Again, I’m not necessarily against cuts to defense (if they’re smart and appropriate then fine) but you have to again admire the way this is being done – defense cuts and cutting “Even Start”, a program created in the late 1980s to promote literacy for young children and their parents.
Of course Even Start was probably a boondoggle from the start, but what does it do for the administration – give them political cover and somewhat immunize them from criticism.
Smart politics, to a point, but absolutely irrelevant except as a show piece and certainly pitifully insignificant as a spending cut.
I‘ll be traveling most of the day, but I have to tell you that I thoroughly enjoyed meeting up with “Pogue Mahone” from our comment section.
We had a fantastic time. Great discussion and enough humor that my ribs hurt when I got back to my room.
More on it later (with a pic as soon as the photographer in question sends it to me), but in the meantime, thanks Pogue!
Dale makes an incredibly important point about investment below – investors aren’t going to commit their money to industries which are being manipulated by government for political goals and payoffs.
And, the Wall Street Journal makes a similar argument about corporate taxation and the Obama administration’s apparent plan to compound the problem he hopes to “deincentivize” by driving both investors and US companies off shore..
The energy picture is no rosier. Because there is no comprehensive and clear-cut, long-term energy plan from government, and because it is clear to many that the present administration’s plans for energy involve achieving political goals dictated by government vs. a straight market based plan which would see decentralized signals and decisions determine the energy future, investors are sitting on the sidelines. As Sen. Murkowski said, too many in national government today see the energy sector, and especially the oil and gas industry, as an “ATM to pay for other programs”.
When government is so deeply involved in picking winners and losers, investors are not going to invest. Especially given the example of the car and financial industries.
You can guess what that means in terms of economic recovery, not to mention economic growth. Investment is the engine of economic growth. Without it, nothing sustainable happens. Government can make all the make-work jobs in the world, but until investors commit to the economy, we only mark time economically speaking. If anything government should create a climate that provides incentives for private investors – low taxes, favorable investment rules, etc. to encourage investors to risk their money here in the US.
Instead, we have at least three critical areas where government intrusion and manipulation is having exactly the opposite effect.