Investors to Stimulus Lubber Gordon Brown: Stop It

♠ Posted by Emmanuel in ,, at 3/26/2009 08:25:00 AM

As I've said again and again to the point of grating on blog readers, this is exactly what the rest of the world needs to do to the United States: like Barack "Trillions in Deficits" Obama, British PM Gordon "British Jobs for British Workers" Brown has been throwing good money after bad at stimulus packages without much afterthought. Like the US, the UK thought that its currency's status as a reserve unit could finance unprecedented fiscal expansion. As I've said before, both plan a level of (fiscal) debauchery unseen since the heyday of Sodom and Gemorrah. Well, the UK now finds itself in a bit of a pickle as a gilt auction has just failed (cue "Hey Big Spender" above to up the irony factor):
Wednesday’s failed government bond auction [NOTE: see my explanation below] looks ominous for investors, as auctions rarely fail in the sovereign market. For a government looking to raise a record amount to pay for fiscal stimulus packages and bank bail-outs, a trend of bond auction failures could put serious pressure on the public finances. This would force the Debt Management Office to reconsider how it will raise the £148bn – a record annual amount – it plans to issue in bonds in the 2009-10 financial year. It could even put pressure on the Bank of England to increase interest rates to push up bond yields and make the securities more attractive to investors.
The repercussions are forcing Brown to rethink his free-spending ways:
Gordon Brown last night backed away from plans for a recession-busting spending spree in next month's budget, after City investors delivered a stern message about the health of the public finances by shunning a sale of government debts for the first time since 2002.

In New York to canvass support for a deal at next week's G20 London summit on a worldwide economic rescue package, the prime minister said he had no plans to add to the £20bn fiscal stimulus announced by Alistair Darling last autumn, saying there were other "effective and quicker ways" of kick-starting demand.

Back in London, investors sent shockwaves through financial markets by shunning a £1.75bn auction of government IOUs - gilts - amid mounting fears about the Treasury's ability to pay for its bank bailouts and fill the hole left by collapsing tax revenues. "This is a bit of a shot across the government's bows," said Jonathan Loynes, of Capital Economics.

The prime minister's enthusiasm for an international economic agreement on tackling recession had been widely interpreted as an attempt to win political cover for a renewed spending spree at home, but he played that idea down yesterday. "Nobody is suggesting that people come to the G20 meeting and put on the table the budget that they're going to have for the next year. What we are suggesting is that we have together to look at what we have done so far cumulatively," he said.
I will soon outline a non-wussy plan (as opposed to an Olive Oyl one) to get the US to behave. Yes, it involves flexing LDC muscle as if it were 2009 instead of 1964. Uncle Sam has been a very, very naughty boy indeed. With the notable exception of Britain for reasons you can deduce from reading the articles linked to above, most other countries have shown displeasure at America's plan to run up ten trillion or so dollars in debt over the next decade. A stimulus-addled United States is a danger to itself and the world economy. If market discipline is not enforced, then other ways should be found to make it cut the crap. Go ask Gordon Brown (reprise "Hey Big Spender"). Why should anyone have to put up with this nonsense?

The notion of a "failed" auction simply means HM Treasury did not find enough buyers for the entire face value of bonds announced prior to auction (£1.75B) at prices deemed acceptable by the government. Only £1.627B worth of 40 year gilts were awarded as other investors are requiring a higher yield for the risk they perceive in holding British gilts. In other words, the auction's "bid-to-cover ratio"--the ratio of bids received to bids accepted--was less than 1.