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UK Fails to Borrow Enough Money   March 25th, 2009
And the U.S. is going down the same road       

 
QUICK OBSERVATIONS

More observations...
 

The UK's failure today to sell all the debt it was attempting to sell might be a warning to the U.S.

The British government's auction of 1.75 billion pounds ($2.6 billion) of 40-year Treasury bonds, or gilts, failed to attract full coverage Wednesday, drawing bids for only 93% of the total supply, the U.K. Debt Management Office announced.... A wide tail reflects weak demand. Analysts said the failure reflected worries about a sharp rise in debt issuance as Britain deals with widening budget deficits.


In other words, the UK wanted to borrow $2.6 billion, but was only able to borrow $2.4 billion.

Earlier this month the UK's Central Bank started printing money to buy government bonds. Unsurprisingly, that makes investors nervous about the value of the currency and the government's ability to pay it back. This reduces demand for the government's debt. In this case, the government came up 7% short. So if the government really needs to borrow the money, their Central Bank will have to print some more to loan to the government. That will make investors even more nervous and further devalue the currency so next time around, perhaps investors will only be willing to borrow 85% of what the government wants... so they have to print some more. And so on.

This is the dangerous cycle I described last week.

What is worrisome is that the U.S. has headed down the exact same road. The Federal Reserve essentially started printing the first $7.5 billion today.

Update a few minutes later: Others are saying the same thing:

Investors view the news as a warning sign as the country is forced to use "quantitative easing" [printing money] to stimulate the economy. The U.K. government is looking to sell a record 146.4 billion pounds in debt this year.

The U.S. govenment will also have to sell record amounts of bonds to finance the deficit. Risk of a failed auction in the U.S. is low, but with the U.K.'s failed attempt it could be a warning sign.


Note that this actually started as a warning back in January. Germany failed to cover their bond offer on January 7th:

The 10-year bonds failed to attract enough bids to reach the 6bn the German government wanted. Bids of 5.24bn, a cover of only 87 per cent, amounted to the second worst auction on record in terms of demand...

Analysts said the vast amount of supply is deterring investors and a growing number of countries, including those with deep and mature bond markets, such as Germany, the UK and Italy, are struggling to attract buyers.


So first Germany was unable to raise the money they wanted. Now, a few months later, the UK is unable to. If we continue down the road of deficit spending, eventually the U.S. is going to have the same problem.

And this quote is amazing:

There will be no retreat from the Federal Reserve's innovative policy tools and fears that they will spark runaway inflation are overdone, Janet Yellen, president of the San Francisco Federal Reserve, said Wednesday.


What's innovative about printing money?

And how about this:

Treasury Secretary Timothy Geithner said Wednesday a strong U.S. dollar is in America's interest.


If a strong dollar is in our interest, why is the government adopting a policy that debases its value? The logical contradictions being emitted by this administration are breathtaking.

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