Need a burst of anxiety courtesy of the pitiless abyss that swallowed High Finance? Then let’s talk bonds.
So, what happens when a government creates debt and no one buys it? Specifically, what if the government of one of the strongest economies in the West created debt and no one bought that debt? Well, it’s happened in Germany. The Telegraph’s own Zarathustra (Ambrose Evans-Pritchard) has the details:
The danger became all too real [January 8, 2009] when even Germany failed to sell a full batch of government bonds at its annual `Sylvester Auction’, which kicks off the debt season. Investors took up just two thirds of a €6bn (£5.6bn) sale of 10-year Bunds, leading to consternation in the markets. Bund price dropped sharply as the yield jumped 34 basis points to 3.29pc, with copy-cat moves by bonds across the eurozone. “It’s very poor,” said Marc Ostwald from Monument Securities. “In 20 years covering Bund auctions I can’t remember the Bundesbank ever being left with a third of the bonds.”
And it’s Britain and Spain on the chopping block next because they may not be able to maintain their credit ratings, which diminishes the attractiveness of their government-issued bonds to potential investors. Obviously, Pritchard sees this as indicative of the shape of things to come. And, for effect, he’s called the top-and-pop of the “sovereign bond bubble.”
This means there’s a horrifying “what-happens-next” narrative emerging for the United States: the government will be the only major, domestic economic actor spending money, but the government will need other international actors to finance the accrued debt. And, according to Pritchard, it may be the case that it won’t be bought by our most vital economic ally:
Beijing needs the money at home in any case to prop up the Chinese economy – now in trouble. Even Japan has slipped into trade deficit. Clearly, the US and European governments cannot rely on Asia to plug the $3,500bn hole in their budgets this year.
Henry Kissinger concurs via an articulation of the conventional geopolitical wisdom on China:
… the Chinese growth rate may fall temporarily below the 7.5 percent that Chinese experts have always defined as the line that challenges political stability. America needs Chinese cooperation to address its current account imbalance and to prevent its exploding deficits from sparking a devastating inflation.
Hoping the depression would improve soon? Breathe a little bit and enjoy the oxygen, because it only gets worse from here on in.