Government To Auction $104-Billion Next Week

Since President Obama took office, the Fed has issued roughly $33-billion dollars in new Treasury Securities a week.

Ten weeks, that's $330-billion dollars, roughly the amount of our total budget deficit in 1983.

Reading this article from CNBC (unbelievably, owned by NBC) one can get the sense of disaster looming on the horizon. This $104-billion dollar auction is roughly a third of our total budget deficit for 1983. But it's not going to stop here. There are going to be more mega-auctions in the future.

For those of you who are aware of the way things are priced, what do you think will happen to the price of these securities? Will they be going up? Or, will they be going down?

When there's a surplus of a good--any good--in a market, what we tend to see is the price of that good moving downward. It's one of those simple facts of life we forget about when we start claiming that monopolies and oligopolies can artificially set a price. But experience teaches another lesson; even monopolies are encouraged to reduce prices to maximize return on investment. Setting prices artificially too high results in unrealized returns on ones investment.

Unlike monopolies, government securities face a lot of competition. And not just with other government securities, like state and local bonds.

So, what would induce you to invest your cash into a newly issued federal note? Most people would say it's the interest rate offered by the note. Buy a one hundred dollar note for a year at ten percent interest rate, and the end of the year you get $110.00. Neat.

But what is the real rate, if in an auction, that $100.00 note sells for $90.00? Prices going down are a good thing, no? Not in this case. What was a ten percent interest rate has now turned into a 22 percent interest rate; $110.00 for a $90.00 investment. The nominal value of the bond remains the same, but the actual interest rate required for someone to buy this note has jumped up by more than two times the offered rate. Just as markets determine price, markets also determine interest rates. And not always in the way Leftist Intellectuals want them to be determined. They can cry and moan about monopolies, oligopolies, globalism and all the rest--including evil corporations and sustainability--but at the end of the day, the world's billions of people, acting out of their own self-interest, determine the price of goods and services regardless of the policies of those who would be our masters. Democrats are especially good at ignoring the realities of the financial world, more used to name calling those who point out the errancy in their Vision!™ And, since markets are more powerful than governments, as Leftists continue to see their ineffective Vision!™ continually trumped by markets, they seek greater and more intrusive controls over transactions. This, of course, is called "regulatory reform."

Remember, the Soviets entered Russian politics with a rather more or less unregulated economy. By the time they were done, they were basically a broke, third world country. And seventy years behind the rest of the world. Even the great Communist apologists recognized the organizing efficiency of free market capitalism. Their response was to sabotage when possible the West in order to help ameliorate the rational observed, quantitative differences that were apparent between capitalism and socialism.

But, the point here is just this simple: we cannot continue to issue debt as a nation at this rate. Increasing interest rates combined with increasing unemployment, taxes and regulation does not bode well for the hope that our economy will recover and grow. If you know a Democrat, do yourself a favour and point this out, won't you?