Why is a US Failed Auction So Feared?

crude is the reserve currency, and at the moment, we are the only ones who can cover it

 

Well the treasury has redeemed 41 trillion this year alone. 350 trillion since 2001.

The NY Fed describes the way in which their operations are intricately intertwined with the US Treasury:

“Staff on the Desk start each workday by gathering information about the market’s activities from a number of sources. The Fed’s traders discuss with the primary dealers how the day might unfold in the securities market and how the dealers’ task of financing their securities positions is progressing. Desk staff also talk with the large banks about their reserve needs and the banks’ plans for meeting them and with fed funds brokers about activities in that market.

Reserve forecasters at the New York Fed and at the Board of Governors in Washington, D.C., compile data on bank reserves for the previous day and make projections of factors that could affect reserves for future days. The staff also receives information from the Treasury about its balance at the Federal Reserve and assists the Treasury in managing this balance and Treasury accounts at commercial banks.

Following the discussion with the Treasury, forecasts of reserves are completed. Then, after reviewing all of the information gathered from the various sources, Desk staff develop a plan of action for the day.”



So you can see that this is all well orchestrated policy. The Fed and Treasury are working in tandem with the Primary Dealers. As mentioned, part of the agreement in becoming a Primary Dealer is to make a market in treasuries:

“The primary dealers serve, first and foremost, as trading counterparties of the Federal Reserve Bank of New York (The New York Fed) in its implementation of monetary policy. This role includes the obligations to: (i) participate consistently as counterparty to the New York Fed in its execution of open market operations to carry out U.S. monetary policy pursuant to the direction of the Federal Open Market Committee (FOMC); and (ii) provide the New York Fed’s trading desk with market information and analysis helpful in the formulation and implementation of monetary policy. Primary dealers are also required to participate in all auctions of U.S. government debt and to make reasonable markets for the New York Fed when it transacts on behalf of its foreign official account-holders.”

Therefore it is misleading to imply that the auctions might fail due to a lack of demand or some sort of funding failure. The Primary Dealers are required to make a market in government bonds. None of this means auctions can’t fail or that the US government couldn’t choose to default. It could. But that would be political folly and misunderstanding. Not due to a lack of funding.

Also note that when the government spends, it adds the same amount of reserves to the banking system. Reserves are then used to buy treasuries. do you get it