Who will give us money?

I was reading through The Daily Capitalist blog tonight, and I read a post entitled “The Chinese Aren’t As Dumb As the Fed Thought” that reminded me of a news blurb I saw today.  It seems that there was much less interest in today’s Treasury auction of 5 year notes than was expected.

According to MarketWatch, The Treasury Department sold $34 billion in five-year notes to yield 1.849%, higher than traders had expected before the results were announced.

Bidders offered $2.02 for every dollar sold, compared to an average of $2.17 at the last four auctions.

Indirect bidders, a closely watched metric because it includes buying by foreign central banks, bought 30% of the monthly auction, the lowest since December.

I could have sworn that I saw that they were auctioning off $40 billion today, but I must have been wrong because I can’t find it anywhere.  The Treasury press release dated March 19th also says $34 billion.

Anyway, it appears that there’s just not as much interest in loaning the US money as there was a few months ago.  This can be taken in one of two ways:

  1. The economy is recovering and people think they’ll get better returns in the stock market.
  2. The US dollar is toast and everyone knows it, so fewer people want to invest in US government debt.

I don’t think #1 is the reason.  #2 is much more likely because the Federal Reserve is now directly printing money (buying treasuries with funny money) and what’s the use of buying US debt if it’s soon going to be worth less?  Or worthless?

As I’ve mentioned before, the Chinese aren’t stupid (that’s what The Daily Capitalist post above reminded me of) and they appear to be loaning us less money as well.

Speaking of The Daily Capitalist, the post I linked to above makes some good points regarding the Chinese hinting at a new reserve currency:

I see this as a crack in the dyke so to speak. When a power like China says these things, it’s serious. Things aren’t going to change overnight because of the complications of international trade and the role of currencies. But I see a trend. Last week’s announcement by the Treasury and the Fed that they were going to print a trillion dollars helped the discussion along. The whole world knows that eventually we’ll see inflation and the further devaluation of the dollar.

The consequences to us as a result of being replaced as the world’s reserve currency will be a further depreciated dollar. It will also make our taxes go up to pay the increased interest costs on our national debt as the Treasury finds it needs to make the rates on Treasuries more attractive to foreign investors.

What could replace the dollar? The Chinese and others suggest the IMF issue bonds backed by a basket of currencies—special drawing rights (SDRs). This would in essence, try to replace the dollar as a reserve currency and sort of create a supranational central bank. This is the worst thing that could happen to us. We’d have a group of Keynesian econometricians who are worse than our Keynesian econometricians controlling the world’s currencies and international trade. Trust me when I say we would get the short end of that stick.

What about gold? It worked pretty well for the last 6,000 years of human history. It is valued by everyone, it is seen as a monetary metal, it would create a stable medium of exchange, there is plenty to go around, and it takes away the power of the central banks to inflate. I believe, as do most free market economists, that it would serve us well. We’ve heard all the arguments against it and have some pretty good answers. This is not the time for me to expound on gold; I will do that at another time.

Another government engaged in the “quantitative easing” strategy is Britain.  Quantitative easing is the euphemism Keynesian economists like to use instead of “cranking up the printing presses” or “printing money” or “making funny money” or “lets send the whole country to hell in a hand basket – fast!”  I guess they think people won’t understand what they really mean, so they can get away with it.

According to MarketWatch, the British had a failed auction today.  A failed auction is where there aren’t enough buyers for the amount of debt you’re selling.  In the British case, they were trying to borrow a measly 1.75 billion pounds (about $2.6 billion) and they only received 1.63 billion pounds ($2.3 billion) of bids.

The failure significantly limits the scope for further stimulus borrowing, said Nick Stamenkovic, an economist at RIA Capital in Edinburgh. “It’s a warning shot about the fiscal position … It would suggest that the government’s scope for further fiscal easing is extremely limited,” Stamenkovic said. (Fiscal easing is just Stamenkovic’s euphemism for printing money out of thin air and expecting it to actually be worth something.)

Printing money comes eventually dooms every government that’s ever tried it.  History is full of examples like Rome, France, Germany, Argentina, and Zimbabwe.  I wish it were not that way, but we seem to be racing towards that same end as fast as possible.

But a review of expansive monetary practices and the effect on the governments who tried it will have to wait for a later date.  I also need to write about how the Keynesian policies have never worked (that I’ve found), and about how the debt of 1929 compares to day – and the results of a debt bubble.  And about 5000 other things….

gk

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One Response

  1. Amen, Brother! Last night I bought a Zimbabwe $100 trillion banknote on eBay. I’ll put it up on my bulletin board with my Weimar Republic 1 million mark note. Not sure where interest rates are going yet. The new money isn’t hitting the economy. Perhaps when deflation has run its course.

    Excellent post. And thanks for featuring my articles.

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