The big news in finance this week is from the US Treasury, which continues to borrow huge sums to finance its ongoing fiscal deficits. For the first time since anyone can remember, Treasury will be holding four auctions this week, from today’s 10-year TIPS up to the 30-year bond. Previous weeks had seen no more than three auctions.

Many people are saying: “How can we keep borrowing so much money? Interest rates will have to rise, the dollar will have to cheapen, and inflation will have to start really climbing.” Correct in theory. In practice, the people who expect inflation have to explain why the world’s investors, including its central banks, are still stampeding into US Treasury debt at interest rates that seem ridiculously low to the naked eye.

A profligate government which is borrowing like a drunken sailor to fund programs of dubious economic value (like cap/trade and universal health insurance) can certainly expect to find people competing against it for capital. All else equal, such competition will raise borrowing costs and cheapen the dollar. But that can only work if there are better alternate uses for the money.

We have to contend with what reality is telling us. Markets are not finding better uses for their capital (or more precisely, higher risk-adjusted rates of return), so US sovereign debt is the investment of last resort. That implies that we’re still facing a significant amount of deflationary pressure, and a growing realization that the economic recovery everyone expected three months ago is not just around the corner, but instead remains far ahead of us.

Today’s auction of 10-year TIPS securities will be very informative. Observers are expecting low demand for this security. This actually is normal, as not many people buy TIPS as a normal portfolio strategy. (TIPS are inflation-protected securities. Every year, an amount which is determined by the reported consumer price index gets added to the principal value of the security.)

But people will be crunching the numbers from today’s auction very carefully to discern what Mr. Market is telling us about his expectations for future inflation. At this writing, the expectation is that the TIPS auction will come off at a relatively narrow spread to the prevailing rate for nominal 10-year Treasury notes. That would signify that the market expects inflation to remain subdued as economic stagnation continues.

Update:

Here are the results of this afternoon’s 10-year TIPS auction. The auction had a moderate-sized “tail” of about three basis points. This means that slightly less demand for the issue actually materialized than had been anticipated by the market in “when-issued” trading prior to the auction: not good, but not abnormal. As I write, the spread between the auctioned TIPS rate and the nominal 10-year rate is about 158 basis points: quite narrow, both historically and by comparison with the past several weeks.

The auction wasn’t a bombshell. The results suggest a continued expectation by the capital markets that inflation will remain subdued, which in turn implies an expectation of continued economic weakness. So far, the market is being reluctant to discipline the drunken sailor who sits in the Oval Office.