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US Bond Auction Fails and is Bailed Out by the Fed

Aug 08, 2009

It appears that not all is well in Metropolis, Superman. Foreign nations are not buying our debt, and that recent treasury auctions have succeeded only because the Fed has stepped in to do what other countries cannot or will not do.


Just last week, when the auction results were announced it was trumpeted to great fanfare that there was "more than sufficient" bid-to-cover, "strong demand" and all the rest.

And now it turns out that 47% (!) of the bonds that were taken by the primary dealers in that auction have been quietly bought by the Fedand permanently secreted to its balance sheet.

. . . . A more honest and open approach would have been for the Fed to simply buy them outright at the auction but this way, using "primary dealers" and "POMOs" and all these other extra steps the basic fact that the Fed is openly monetizing US government debt is effectively hidden from a not-too-terribly inquisitive US press and public. 

The speed of the shell game is accelerating.

This immediate repurchase of newly auction bonds by the Fed tells us that demand for these bonds is not nearly as high as advertised, and that things are not quite as strong as represented.

What does this mean? One of two things (or both): First, it certainly indicates that other countries with extra cash (like China) are afraid of a default or a huge devaluation of the dollar. They hold so many dollars in their reserves that they stand to lose literally tens or even hundreds of billions of dollars of purchasing power if the dollar collapses. So the low interest rate is not nearly enough incentive to buy treasuries.

Second, it may also mean that some countries (other than China) are running low on cash. Particularly the oil-producing countries. They were making a lot of money a year ago, but then the oil companies decided to declare war on them by opening up oil fields off the coast of Indonesia and north of Russia to create a glut of oil and drive down the price to $50/barrel. The oil-producing countries had already planned their budgets based on $80/barrel oil, so they began to run deficits, and soon their supply of dollars dwindled. That may be a contributing factor in the failure of the bond auctions last week.

Whatever the case, the Fed's purchase of bonds (by creating new money) is a signal for greater inflation in the months ahead, assuming, of course, that this new money actually hits the streets and is not simply given to bail out banks and insurance companies. Perhaps the new anti-inflation strategy is to soak up money off the streets and give it to the big banks, so they can in turn give big bonuses to the ones who caused the problem in the first place.

All in the name of saving the economic system, of course.

Meanwhile, no one wants to report on this manipulation, because they don't want to be accused of uncovering what the Fed has tried to cover up.

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Category: News Commentary

Dr. Stephen Jones

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