I've been saying for a while now, that the US and UK authorities are going about dealing with the financial crisis the wrong way. They have been thinking they can simply issue more national debt instruments ad-infinitum, and someone, somewhere will always step up and buy them.
Lately, signs of stress in this theory are very evident. The Chinese have started to balk at buying up our long term debts (Gilts in the case of the UK, T-Bonds in the case of the US).
We saw a "failed auction" in the UK for very long-dated Gilts, but subsequently saw filled auctions for shorter duration Gilts and for Index-Linked Gilts (inflation linked -- this tells you just what you need to know ;-) ) and very recently I posted a chart from the latest BoE quarterly report, showing that they were the only buyer of the bonds that were most recently issued; other players were net sellers. This all adds up to investors being highly dubious about the propects of the UK going into the future.
Lately we are also seeing statistical evidence that demand for US long bonds is very much dwindling -- people are preferring to stick to much shorter maturities (2 year), because they are rightly concerned about the future of the Dollar.
The biggest concern is that our governments will continue to insist on issuing debt, rather than addressing the real fundamental economic problems at hand, and that they will buy up their own debts in ever-larger doses and using new money printed up just for this purpose.
That is exactly what took place in Zimbabwe, Weimar Germany, Argentina, Brazil, or indeed any number of other instances you might like to go and find in the history books.
The big, big problem in the case of the dollar though, is that its not just the US that will be sucked in if/when the fire gets lit -- the US dollar is the predominant international reserve currency, the benchmark against which the price of everything in the world is priced ultimately. This will be a vastly bigger problem than anything that has ever gone before.
This is going to be some ride. I don't think any of us will enjoy it. Bummer.
Wednesday, 3 June 2009
The last bubble exploding right now? Bonds
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