Free Markets, Free People


Another Troubling Sign

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.”

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18 Responses to Another Troubling Sign

  • Quick! Peg the dollar to the Renminbi!

  • Now what happens to the RMB if they stop sterilizing their USD and buy gold instead? 

    It should appreciate like crazy, causing a big spike in the prices of imports for the USA. (You know, if low-cost Chinese imports “held back” inflation in the past, they could equally fuel inflation now until other non-Chinese suppliers could be found.)

    Buckle your seatbelts.

  • Is it time to start converting the turkey fryer into a hobo stove?

  • When the fed buys treasuries to increase the money supply does that appear on M2?  Or was that part of the now … we no longer report it because its not useful-wink wink… M3?

    Also according to the feds statistics (available here: http://www.federalreserve.gov/releases/h6/Current/) the M2 has only gone up by about 13%.  Where does the doubling figure come from?  I am not contesting it, but would love to know if there is backup for it.

    GH

    • Good catch.

    • Mistake on my part. That should read “monetary base”.

      • So why has the monetary base (M0) doubled in the last year and mostly during the time when, we were told, Serious Things had to happen to get the banks a-loanin’ again? If all that currency (M0) is floating about, doesn’t that mean that people are LESS likely to be in the borrowin’ market? If people aren’t a-borrowin’, then doesn’t that mean that banks are LESS likely to be a-borrowin’ from each other? Is this not all The Way It Works?

        The older I get, the more I learn and the less I know. It’s all one big whiskey tango foxtrot.

  • here comes the inflation. A bit earlier than I expected. I should have bought gold two weeks ago.

  • The fed sells a trillion or two dollars worth of securities, then it buys a few hundred billion worth, then it sells some more,…..

    It has always puzzled me how this constant buying and selling of securities was anything more than some kind of paper shuffling scam, but I always assumed (hah!) that the geniuses at the Fed and treasury knew what they were doing. No more.

    It is a telling sign  when even ignoramuses like me can figure out that the usual suspects (the Chinese  and others)  aren’t going to be able or willing to soak up all those treasury offerings before the financial wizards in Washington do.

  • I believe I posted this here earlier in the week …

    China joins the “Tea Party” “… up until last month they were the number one provider of currency to the United States and now they’re gone.”

    … I seem to remember that I got a response with a couple of articles saying it wasn’t true .. I told him to go short.

  • The “Carter redux” begins ..
    .. the only remaining question .. who will play the art of Reagan ?

  • Can we have our cake and eat it, too?!

    Yes we can! No we can’t!

  • As Glenn Reynolds says, “The country is in the best of hands.”

    If we all get together and chant “yes we can” (and don’t forget to click your heels together kids!) loud enough all our problems will be solved.

    Perhaps merely repeating the name of our savior will do it…
    “Obama, Obama, Obama” (best done like Randy from South Park, in a slurred drunken chant)

    This is a variation on an older now probably politically incorrect demonstration of faith, pertaining to belief in fairies…
    If you believe,” he shouted to them, “clap your hands; don’t let Tink die.”

    You realize new measures will HAVE to be taken to deal with THIS crisis.  I’m thinking perhaps it’s time to force the telecom industry under government control, the revenue stream from text messaging and twittering will be awesome.

  • Let’s not forget who is on the hook to pay off those higher interest rate bonds?  None other than the taxpayer. 

    • To be done when TAO has left office, like so many of the Ponzi artists we now have running the government.

  • I have a vision of  Obama, Nancy Pelosi and Harry Reid in ROTC uniforms on Main street in the town of Faber,  Congress and the media are sitting in the reviewing stand, and the Death Mobile hasn’t showed up on the scene yet.

  • Where oh where is the optimistic! one?