A German sovereign bond auction failed on Wednesday as investors shunned one of the most liquid and safe assets in the world in a warning for governments seeking to raise record amounts of debt to stimulate slowing economies.
The fate of the first eurozone bond auction of 2009 signals trouble ahead as governments around the world hope to issue an estimated $3,000bn in debt this year, three times more than in 2008.
There will be more bond auction failures this year, perhaps even an unprecedented one in the market for U.S. Treasuries. Our Chinese creditors are getting tired of risking their domestic stability to feed Uncle Sam's profligacy:
China has bought more than $1 trillion of American debt, but as the global downturn has intensified, Beijing is starting to keep more of its money at home, a move that could have painful effects for American borrowers.
Would the American people even notice if the U.S. government failed to clear a Treasury auction? Not if Helicopter Ben has any say in the matter. The multi-acronymic lending facilities that the Fed has created to print money can easily be used to clean up a government bond auction in the event of a panicked call from the Treasury Department. Once that precedent is set, it can and will be used more frequently as other foreign central banks opt to spend currency reserves at home. That's how the U.S. dollar will be debased in 2009.
I remain long gold. Now you know why.
