Unnerving Investors

We have wrote much in the past about the huge amount of money that the Federal government is borrowing. Just to remind you, this is done by the Treasury auctioning off IOU's. Investors and other governments who want to collect interest from the U.S. government show up at the auction and buy these IOU's.

But what happens if the Treasury has too many auctions? What happens if few investors show up at the auction?

Today in the paper, USA TODAY they had an article that gives us pause to wonder if we may be about to find out.

Many managers say the Treasury’s increased borrowing is pushing rates up. “It’s mainly the amount of supply and the market’s ability to absorb it,” says Robert Auwaerter, head of fixed income at Vanguard, based in Valley Forge, Pa.

Treasury investors had become too complacent, assuming that all auctions would go smoothly, and were shocked when last week’s didn’t, says Robert Gahagan, senior portfolio manager at the American Century funds in Kansas City, Mo. “It was like someone tapped the fish bowl and all the fish went to the other side.”

The sheer number of auctions may be unnerving investors, too. The Treasury used to auction three-year, 10-year and 30-year Treasury securities every three months. Now the auctions are every month because of Treasury’s big borrowing needs. “You just can’t get away from these auctions,” Auwaerter says.

See it here; http://www.jaxobserver.com/2010/03/29/treasury-yields-rise-on-lower-demand/

It's very simple to understand that if investor's appetites have fallen for Treasuries....the Treasury will have to start offering higher interest rates to "convince" people to buy them.

It's also very simple to understand that if the U.S. government can barely make the payments currently on some $trillions of dollars of debt.....how well do you think they will manage if interest rates double....or triple...or quadruple?

It easy to understand that if this situation happens....the U.S. government will need to print copious amounts of money to pay back investors. If they do, it could spell a catastrophic fall for the U.S. dollar.

After all, what good is a bunch of paper that says it's worth $1 million dollars.....if no one will take it in trade for a loaf of bread?

Can you open up a Monopoly game and use that money for anything?