So it happened yesterday. It was the first market warning, the first inkling of trouble. Is it the first shockwave in a larger earthquake, or will the authorities take heed and shift to stronger ground?
The failure to sell all their offering of long dated government stock – a 40 year IOU which we the taxpayers have to pay interest on for that whole time period and then repay the capital – comes as no surprise to readers of this blog. What else could you expect?
We had comfirmation yesterday that they have sold £145 billion of IOUs so far in 2008-9 financial year, as well as billions in National Savings. I think that reinforces the £157 billion figure for this year’s borrowing I have been using (lifted from government documents), rather than the £78 billion the media and Chancellor have been using. That is, by the way well over 10% of National Income!
The auction flop was either incompetence or naughtiness by the authorities. It all goes back to Gordon Brown’s wrecking of the financial architecture when he first arrived in 11 Downing Street. He took debt issue away from the Bank of England and gave it to the Treasury. More recently the Bank has been given the task of printing the fivers and buying up the government’s own debt to keep the market up. Clearly this week the left hand of the Treasury and the right hand of the Bank were uncoordinated, did not understand what each other was doing.
In one clumsy move the Bank and the Treasury wiped out all the “gains” they had made in the government debt market by buying up government bonds with printed money. Prices fell back to where they were before the government buying as news came out that they had not managed to sell all their offer. The Governor also did his bit to undermine prices by saying he might not spend all the £75 billion after all. That is monumental incompetence. Surely you can sell all a gilt issue if the government itself is a massive buyer of gilts?
The Treasury decided to offer a very long IOU. The Bank is not buying long ones. The Treasury presumably thought the Pension Funds, effectively made to buy long government debt by the Regulator and the Actuaries now so many funds are “mature” (closed to you and me), would welcome something that long. Despite the pressure to buy these lovely gilts, clearly pension fund managers are thinking twice about lending so much at so low a rate of interest to the government.
So it was either incomeptence, or the Bank and Treasury had hatched a plot to have a little failure to warn the Prime Minister against more reckless borrowing. When in doubt, go for incompetence as the explanation.