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.”