The UK had its first bond auction failure since 2002. This essentially means they were unable to find enough buyers for the supply they were offering (1.75 billion pounds). This certainly makes it apparent that the risk of additional auction failures going forward is likely to increase. This is significant since governments around the world all sell debt in this manner to prop up their currencies and enable government spending.
In the US this week, the Fed purchased $7.5 billion of Treasuries in the first outright purchase by the central bank of government debt since the 1960s. Interestingly, with all their efforts they have been unable to reduce the consumers' interest rates as well as borrowing costs for banks. Those are some of the major justifications for engaging in this debt purchasing. The difference between 30 year fixed mortgage rates and the 10 year Treasuries was about 2.24% according to Bloomberg. This spread averaged 1.75% in the decade before the subprime collapse.
This illustrates a reality of money printing that will be referenced often going forward in this blog- "The Cantillon Effect". Essentially, our government concludes that printing money will solve our problems without causing any inflation. The reality is that inflation does not occur all at once and to the same degree. Those who receive new money receive it before prices rise. Who receives the money first? The guy/gal who is looking to get a 30yr fixed mortgage? No. The investment banks and commercial banks do. By the time the new money has filtered through the system, prices have all ready risen. The result is that the average person's purchasing power is lessened, interest rates have risen, and the cost of money is higher. Less purchasing power with the money one has plus a higher cost of money. The fact the we currently have a zero rate interest policy from the FOMC and yet the 30 year fixed mortgage is widening from the 10yr (which is supposed to be representative) shows how impotent all these policies really are.
In sum, "The Cantillon Effect"= Banks borrow cheap from government; Consumer overpays for the cheap borrowed money the bank is providing AS prices are rising in the economy.
Hamiltonianism at its best- a centrally planned mess for the individual....
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