"Terrible" Treasury Auction Signals Rough Economic Waters Ahead

"What if we hold a treasury auction and no one shows up?" That was the question posed by Ed Morrisey at Hot Air after a Treasury Auction saw the Treasury having to offer higher than planned interest rates to induce buyers to purchase our government's bonds. The answer - it means trouble for the economy. As the Heritage Foundation puts it, "[t]his is just the first sign that the debt-based Obama economic stimulus plan is about to become a major drag on the recovery, just as expected."

According to the Heritage Foundation, signs are that the recession is bottoming out and the economic situation will stabilize this summer. That signals the start of the unplanned consequences of the massive spending by Obama. This from the Heritage Foundation:

There are two critical consequences to the economy stabilizing. The first is that the massive liquidity injected into credit markets by the Federal Reserve and central banks around the world transforms from economic medicine to inflationary heroin. Central banks are going to face a difficult task of extracting the excess liquidity before inflation soars and without causing another recession. Doubt about the fight against soaring inflation means higher inflation premiums in interest rates.

The second dangerous consequence is that President Obama is on course to double the national debt in just four years. After years of complaining about annual deficits of $300 billion or $400 billion and their effects on interest rates, liberal commentators are suddenly silent now that the deficit is heading toward $2 trillion under a liberal administration. But now the vaunted “crowding out” effect from government borrowing is almost a certainty, as are the resulting higher interest rates.

Healing financial markets and a stabilizing economy generally translate into higher interest rates for long-term, high-quality bonds like 30-year Treasuries. The effect of the projected massive government borrowing, however, is to drive interest rates as much as a full percentage point higher yet. This will mean higher interest rates for consumer loans, mortgage loans, business loans, etc. Instead of a 6.5 percent mortgage rate, home buyers will face a 7.5 percent rate. The debt-based Obama economic stimulus plan is about to become a major drag on the recovery, just as expected.

And as Ed Morrisey points out, the rise in Treasury interest rates that resulted from the most recent auction means that the huge defecits forecast by the Obama administration - and, for that matter, the even larger defecits forecast by the Congressional Budget Office - are already unrealistically low. Here is the chart of the estimates:



And to think that my bill of particulars against the Republicans was a lask of fiscal restraint. Those guys were penny-pinchers compared to the real far left deal. At any rate, as Ed Morrisey writes:

These projections had to consider interest payments on all of the debt Obama planned to buy while running these deficits, and any hike in interest rates means that those interest payments will have to go up. That also means that we will have to spend more money than Obama projected, creating even higher deficits and the need for even more bond sales — and more interest payments on those.

It’s basically a Ponzi scheme, and it’s accelerating.

One of two things will have to occur to resolve the situation. Either the federal government will have to massively cut its spending in order to service all that debt at the higher interest rates now demanded, or it will have to pass massive new taxes in order to generate enough revenue to accomplish it. Which do you think Obama is likely to try?

As I've written before, we may soon be pining for the good economic times of the Jimmy Carter economy.