"We are
struck by the size of the needs of the State, and the meager assistance
offered by patriotic gifts..."
-
Finance committee of the French National Assembly, March 1790
BY END-JULY 2009,
sales of new US Treasury bonds had already outstripped full-year sales in
calendar 2008.
Creating money
from nowhere, the Fed's asset-purchase scheme bought bonds equal to more than
18% of that 7-month record, effectively financing $224bn of the total $1.2
trillion in new government bonds.
No, the Fed
didn't simply hand that cash straight to the government. But it funded the
national debt via the primary dealers who did buy the bonds...only to sell
them onto the Fed...and thus stumped up 32% of the net cash flowing to Treasury from its bond sales
(gross issuance minus maturities). Which was handy.
Because the sums
raised by personal taxation fell by one-fifth in the second
quarter compared with April-to-June 2008. Federal spending rose 6.4%
regardless. Money from nowhere sure helped.
What of the
queasing itself, however? Quantitative Easing had a marked effect when the
Fed announced its plan in mid-March. But easing longer-term rates with
quantity hasn't yet worked as advertised.
Bond yields are
now higher from before the Fed's March announcement. More critically still
for whatever "exit strategy" the central bank has in mind (no
sniggering at the back!), bond holders seem keener to quit Treasuries than to
buy them.
New Treasury bond
sales this year have attracted bids for around 2.5 times as much debt as was
on offer. The Fed's bond purchases, in contrast, have drawn offers of four
times as much government debt as it wanted.
Compare and
contrast with the Fed's buying of mortgage-backed bonds – the
ostensible source of the entire financial crisis. There, the bid-cover ratio
averages 1.8 times so far in 2009. And then, take a glance across the
Atlantic...
The Bank of
England has now bought UK gilts equal to all of 2009's issuance to date.
Buying nearly
£135bn-worth inside six months ($220bn), it's financed the equivalent
of nearly a quarter of the UK's outstanding government debt. But that's not
enough apparently. Because governor Mervyn King voted at the central bank's
August meeting to raise the money-creation to £200bn....fully one-half
of the outstanding gilt market.
Besides financing
the state, however, this phenomenal queasing...greater by far than anything Weimar
Germany tried...has seen residential mortgage rates charged to consumers
rise 0.5% on average, hitting 4.4% this summer. Money-supply growth continues
to boom for the financial sector, of course, but the money isn't trickling
through to households. For non-financial businesses, the broad M4 money
supply shrank in July by three pence in the Pound compared with a year before.
Bottom line?
According to BCA
Research, "It will likely be at least until the end of
next year before growth conditions in the US
and UK
are robust enough to withstand a reduction in stimulus."
What all of this
money-from-nowhere might mean for the Gold Price – that historic refuge
from debt monetization and hyper-inflation – who can say? So far, it's
doing little to kick-start a self-sustaining recovery, dumped instead into
Anglo-America's fast-cratering state finances. But if a flight from queasy
economies should slip into a panic, note that the Eurozone isn't safe from
this flood of money ex nihilo either.
Back in June, the
European Central Bank handed out 12-month loans to commercial banks at a cost
of just 1% – its current overnight target rate. No, they're not
financing government debt directly. But that flood of €442 billion,
equal to well over half-a-trillion dollars, pulled down 12-month rates in the
capital markets by pushing bond prices up. One-year German Bunds now yield
just 0.40%. Cheap money parked in government debt wasn't perhaps what chief
central-banker Jean-Claude Trichet intended. But the ECB will repeat its
offer – unlimited quantities of 12-month loans, charged at just 1%
– later this month.
Hence Monsieur
Trichet's piece of pure Greenspanese in a speech on Friday:
"Note that
an exit strategy is not identical to a particular course of action. Rather,
it lays out a framework and set of principles to govern actions in the face
of circumstances in whatever form they take."
Got that? Got gold?
Adrian
Ash
Head of Research
Bullionvault.com
Also
by Adrian Ash
City correspondent
for The Daily Reckoning in London, Adrian Ash is head of research at BullionVault.com –
giving you direct access to investment gold, vaulted in Zurich, on $3 spreads
and 0.8% dealing fees.
Please Note: This
article is to inform your thinking, not lead it. Only you can decide the best
place for your money, and any decision you make will put your money at risk.
Information or data included here may have already been overtaken by events
– and must be verified elsewhere – should you choose to act on
it.
|