Bid to cover ratio on 7 Year Treasury Bonds yesterday - lowest level of year - Here's Why

Dear Reader, every once in a while we need to have a 101. Today is the time for this and it is provided from to good folks at Everbank - specifically Chris Gaffney, their Vice President of World Markets. Here is what he said today that explains the headline above: "

Federal Reserve Chairman Ben Bernanke was on capitol hill yesterday and told lawmakers that the US government's budget outlook is 'somewhat dark' and that congress needs to agree on a plan to reduce the deficit. Talk about stating the obvious!! He was speaking in response to a question about the impact of the health care overhaul on the budget. He successfully avoided talking specifically about the impact of the new bill on the budget deficits (he wants to keep his boss happy!) but he did warn the congressmen that something must be done about the deficits. "Clearly everyone agrees that the overall fiscal outlook for the government is somewhat dark over the medium term, and it would be very useful if there could be bipartisan, concerted effort to explain, demonstrate and decide how the government is going to achieve a more sustainable fiscal trajectory," he said during his testimony.

It is very obvious that we have a deficit problem, but none of our elected officials want to do anything about it. There are three ways we can deal with these deficits. 1. Increase revenue. Yes, taxes are heading up, but not enough to really make a dent on the deficits. And without substantially higher tax rates, the government has to rely on a robust economy to generate more taxes. The data shows that our economy will likely be dormant for some time, so don't look for increased revenues to help with the deficits. 2. Decrease spending. The healthcare overhaul is not revenue neutral (not sure what planet the CBO is on), and congress is looking at other ways to try and 'borrow and spend' our way out of this economic slowdown. I just don’t see our elected officials willing to cut spending.

This leaves us with number 3. Pay down the debt with cheaper dollars. Keep the printing presses in overdrive, generating enough US$ to pay down the debt. This is the 'easy' choice. Just keep printing more money, pushing the problem down the road for future generations. As long as global investors continue to buy our debt, there is no short term harm in keeping the presses running. Just keep producing more debt and selling it to global investors. This looks like the easy solution (if you can call it that) but it will eventually lead us to a lower US dollar.

Yesterday the Treasury Department held an auction for $32 billion of seven year notes, and the turnout was disappointing. Earlier in the week the Treasury auctioned 5yr and 2yr notes, and the demand was equally tepid. The government has been auctioning a steady stream of bonds for months to fund its economic stimulus efforts, and the buyers seem to be starting to push away from the table. The bid to cover ratio, which is a measure of demand, came in at the lowest level this year and has been steadily dropping. The lower demand has started to push yields higher and prices lower. Chuck has warned readers that the Treasury market was the next bubble to pop, and the lack of demand certainly looks bad for future issues of US debt.”

Folks - it's always what is behind door number 3 that you have to watch out for. Personally, I don't like what is behind that door. I'm going to make a wall between myself and the door that has inflation - even hyperinflation behind it. This is why gold supply and demand will be a subject to watch for a long time to come. Gold coin sets are just the antidote to this helicopter money. In my view, these inflation fears are not just fears - they are looking like a reality.