What If You Threw A Borrowing Party And Nobody Lent?
Governments, ready to spend
boatloads cruiseliner-loads of money they don’t have, are trying to borrow it — to the extent possible — from the markets. I mentioned yesterday that the US was starting to print our own money to lend to ourselves. Britain is facing a similar problem — they were auctioning off some bonds, and nobody wanted to buy:
There is a limit to what bond investors will put up with. As governments inflate their fiscal deficits to deal with the crisis, they are issuing an awful lot of government bonds. And some of it is going to prove a tough sell.
Today, the UK suffered a failed auction for the first time since 2002. The Debt Management Office received bids for just £1.63 billion of a £1.75 billion offering. As the government has to sell nearly £150 billion of gilts in the coming (2009-10) financial year, this is hardly an encouraging sign.
To the casual observer, it might seem unsurprising that investors turned their nose up. They were being asked to lend money at 4.5% for 40 years to a country that, even in the midst of a recession, has an inflation rate above the government target, has a deficit expected by the IMF to be 11% of GDP next year, and a currency that has fallen by a quarter against the dollar since last summer.
During the Wall Street “flight to quality” seen late last year, yields on short-term Treasuries dropped significantly as 0.1% returns on short-term bonds were better than the worry of losing 30% of your wealth as the stock market tanked nearly uniformly. But the key there is short-term.
Right now, nobody really believes that governments are going to exercise monetary prudence in the face of cratering economies. That’s true in America, and it’s true in Britain. Why would someone lend money for a 4.5% 40-year return if they honestly think inflation over that time period will ensure they lose quite a bit of money?
Governments are going to borrow lots of money, and the market is not enthralled by the lending terms they’re being offered. There are two ways to get around this. You can offer better terms (i.e. higher yield bonds), but that has the downside of letting the world know that you plan to inflate your own currency. Alternatively, you can simply print the money you need to borrow and loan it to yourself at whatever terms you want. It seems that central banks in the US and Britain are already taking that path, and the market sees the writing on the wall.