With central banks having the reputation now of being the buyer of ALL RESORTS, what might be the consequences if they held a bond auction and no one came to sell?
That is what happened last night to the Bank of England who had recently jumped on the ECB and BOJ bandwagons to buy back outstanding bonds in the hopes of pumping more liquidity into the markets.
On the first day of the Bank of England’s resumption of Gilt QE after the central bank had put its monetization of bonds on hiatus in 2012, bondholders were perfectly happy to offload to Mark Carney bonds that matured in 3 to 7 years. In fact, in the first “POMO” in four years, there were 3.63 offers for every bid of the £1.17 billion in bonds the BOE wanted to buy.
However, earlier today, when the BOE tried to purchase another £1.17 billion in bonds, this time with a maturity monger than 15 years, something stunning happened: it suffered an unexpected failure which has rarely if ever happened in central bank history:only £1.118 billion worth of sellers showed up, meaning that the BOE’s second open market operation was uncovered by a ratio of 0.96. Simply stated, the Bank of England encountered an offerless market. – Zerohedge
Should this anomaly suddenly become a trend for the UK, and for other central banks around the world, it would become the central bank’s biggest nightmare since their inability to pump new liquidity into the markets would usher in even greater deflation than is already visible, and create a scenario where asset prices would suddenly and irrevocably fall through the floor.
(Just look at what is happening to the housing bubbles in places like Britain and the United States when no one is buying new mortgages)
The consequence of turning a capitalist economy into a credit based one is that you set in motion the need to continuously manifest new credit to keep the system from collapsing in upon itself. And all one has to do is look at the United States as a prime example, where since 2008 they have created over $10 trillion in new credit and debt, yet have the worst 10 year growth period in the history of any administration.
Kenneth Schortgen Jr is a writer for Secretsofthefed.com,Roguemoney.net, and To the Death Media, and hosts the popular web blog, The Daily Economist. Ken can also be heard Wednesday afternoons giving an weekly economic report on the Angel Clark radio show.