This Weeks Auctions

Today marks the end of a record auctions week. The government auctioned over $205 Billion dollars of T-Bonds to private investors and foreign governments. By selling T-Bonds to the public the government is doing two things. First, it raises the supply of T-Bonds in circulation. Theoretically this would raise the interest rates. Second, by accepting cash from investors it reduces the amount of cash investors will have to invest with in the future. Combining the double whammy of rising interest rates and reduced cash for investment gives us a good picture of why governments don't like going into debt: they don't like stifling investment.

However, this weeks auctions, under the supervision of the Fed and the Treasury, yielded lower interest rates! This means that investors don't expect inflation to be an immenent problem. It also means that investors still have confidence in the US to pay back the bonds. This is a clear indicator that the Fed is doing a good job because inflation expectations are low while money is being printed to stimulate the economy.

Adversly, though, it means that there will be $205 Billion less for investors to invest with in the future. From an investor's standpoint, it also means that they believe that an investment will yield less than the meager 2-4% the bonds pay them in interest each year.

This weeks auctions show us that the Federal Reserve is doing a good job with what it has to work with. In a perfect world Congress would not be spending like they are currently doing and this would make the Fed's job of handling inflation expectations much simpler. The Bernanke Files is going on record and suggesting that Congress should begin reducing spending soon, and arguing that the Fed has been and will continue doing a good job keeping inflation low while stimulating the economy.