Certain Habits

The US Treasury sells bonds periodically to finance US Federal Government spending. If people—banks, foreign governments, investment funds, etc.—aren’t willing to purchase Treasury bonds, the US government has no other means of funding its (now record level) of deficit spending.

While the World has been glued to the unfolding crisis in Greece—which is in danger of defaulting on its bond payments and, as a result, being unable to convince people to purchase its bonds—there has been increasing concern over “sovereign risk” (the risk that sovereign governments will be unwilling or unable to pay their debt obligations) in other developed countries (Japan, Ireland, other Euro Zone countries, and even the United States).

The canary in the mine will be failed debt auctions. If institutions can’t be convinced to purchase bonds at current interest rates, the debt crisis will become increasingly unmanageable. Increasing interest rates make it more expensive to fund the debt. Greater interest payments increase the deficit, which requires more borrowing, causing bond holders to become more skittish, and demand higher rates. What cannot continue forever won’t.

The most recent Treasury auction was this Friday. And it was as near to a failed auction as we’ve seen.

Graham Summers (ht Random Roger) provides interesting, and harrowing, commentary. You should read the whole thing, but here’s a taste:

This auction was a very small step away from a failed auction. To see Primary Dealers buying so much (remember they HAVE to buy it) and Indirect Buyers so little, only confirms what I’ve been saying for months, that the US is entering a Debt Spiral: a situation in which it must issue more and more debt (while rolling over trillions of old debt) at the very time that fewer and fewer investors are willing to lend to the US for any lengthy period of time (more than ten years).

Folks, forget Greece, the US has its own debt problems. And they’re MAJOR. The fact that stocks RALLIED on this news tells you how disconnected stocks are from reality. The Debt Spiral has started and is now accelerating. It’s only a matter of time before it becomes a full-fledged Crisis

Will our (corrupt and corrupting) political class find the courage to make the difficult choices and step away from the precipice before it becomes too late?

Yeah, I know. I don’t think so either.

Updated:

I finally got around to reading Niall Ferguson’s piece in the Financial Times from February 10. He argues convincingly that the Greek crisis isn’t a function of Greece or the Eurozone. It unmasks the long term consequences of fiscal stimulus and the dangers of debt.

Yet the idiosyncrasies of the eurozone should not distract us from the general nature of the fiscal crisis that is now afflicting most western economies. Call it the fractal geometry of debt: the problem is essentially the same from Iceland to Ireland to Britain to the US. It just comes in widely differing sizes.

What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch. Deficits did not “save” us half so much as monetary policy – zero interest rates plus quantitative easing – did. … [C]rucially, explosions of public debt incur bills that fall due much sooner than we expect.…

Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven”. US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.

Read the whole thing.

Meanwhile, Edward Hugh argues that the faster than forecast contraction in their economy will make the Greek debt crisis much more difficult to address.

Evidently the latest numbers offer the first warning that all may not be as simple as it looks on paper for the Greek government’s plan to set their finances straight. As far as I am concerned the latest numbers simply confirm what should already have been abundantly evident — correcting the fiscal deficit without straightening out the rest of the economic distortions is going to make economic growth something which is very hard to come by.