China Shuns Treasuries
China, now the biggest holder of US government debt, is going on a buyer's strike.
As a flight from risky financial assets pushed Treasury yields close to nil -- and as the once-red-hot Chinese economy dried up -- China's appetite for Treasuries has waned. If the trend persists, it could lead to higher borrowing costs at a time American consumers can barely afford the mountanous debt they already have.
The New York Times reports China's government is keeping more of it's vast cash reserves at home, choosing to invest in its own infrastructure rather than plow money into an investment earning them virtually nothing. Chinese banks, once encouraged to invest money abroad and actively lend to foreign borrowers, are now being urged to keep that money within their own borders.
Lower demand for US debt would lead to lower bond prices, pushing up yields. And since the Treasury market typically sets the benchmark for private borrowing, this would translate into higher rates for mortgages, credit cards and other types of consumer debt.
It's no coincidence that as Chinese appetite for American debt dried up last year, the Federal Reserve began to aggressively buy the assets China no longer wanted. Heavily invested in Treasuries, along with mortgage-backed securities issued by Fannie Mae (FNM) and Freddie Mac (FRE), China's voracious appetite for US debt is being supplanted by that of our own government.
Few experts however, expect China to abandon Treasuries altogether. Such a drastic move would effectively destroy the US economy, which would in turn be disastrous for China, not to mention the rest of the world. Still, each time the government bails out a company like General Motors (GM), Citigroup (C) or AIG (AIG) its standing with debt holders slips.
The timing couldn't be worse for the incoming administration. Promising to keep the deficit upwards of a trillion dollars for the foreseeable future, President-Elect Obama is counting on new debt issuances to finance his aggressive stimulus plan.
Without Chinese demand, Obama will be forced to rely on the Federal Reserve to be the buyer of last resort. As the Fed prints money to buy our own debt, however, each of the precious dollars Obama is pumping into the economy is worth less and less.
If this all sounds eerily familiar, it should.
A certain financial deviant, now a household name, ran a massive Ponzi scheme by repaying early investors with the money of the most recent suckers. His actual holdings were worthless - much like debt issued by a country teetering under the weight of its own massive, bloated balance sheet.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2009 Minyanville Media, Inc. All Rights Reserved.
There are several possibilities of where the money could come from:
1. Further redemptions from the stock market, and a continued flight to safety.
2. Foreigners buying the debt. As you point out they have their own problems and are more reluctant to do so. But they still need our trade
3. Printing money. Fight net deflation but increase government debt.
4. Raising rates to make treasuries more attractive. But this will hit the economy harder, but encourage savings.
Sure makes for an interesting computer simulation, analysis? #3 and #1 seem most likely to increase. As you point out, #2 likely will decrease. #4 would hurt.
When growth returns (and we will need as much of it as possible), people will have their assets reduced in value, and now be responsible for an even larger government debt. No wonder there is such talk of future inflation.
People and countries act in their own self-interest.
Jenny now says, "Let it go"!
Got to go out and make some real bacon (income and growth)
such clarity regarding zero/negative returns on US debt seems to be missed by many professors on this site...
so now the "other show has dropped".... as much as i respect the various "deflationistias" analytical capacity on this site, it seems their view of the world is VERY usa-centric. mentions of global risks such as the middle east as well as china's HIGHLY TELEGRAPHED (october 2008 and perhaps prior) position on US Debt are *almost* invisible. [*economist* mag also had a recent article to this effect, end dec 08]
for instance on 25 december 08, did *ANY& professor care to note that china and russia will now do business directly in rubles and yuan?
anybody... anybody... bueller... bueller???
on the SAME day china also announced that they were going to begin doing business in yuan directly among other asian trading partners? why was THIS little tidbit NOT REPORTED AT ALL here?
reminds me of a grander version of "california ueber alles" by the disposable heroes of hiphopricy[props to DK's earlier work] ... but in this case.... usa ueber alles?
is there an actual "world"... "out there"??? if i don't believe it -- it doesn't exist??? is there anyting beoynd those blue oceans, really?
well i think the deflation argument is about to find out... slowly... painfully... as slowly they describe their deflation scenario... the chinese/world will act MORE slowly and MORE surely... <we shall hope anyway!>
--
basically, why is it that the professors here seem to be engaging in some sort of usa-centric austrian-school economics group think? i don't have a problem w/the austrian-school but i do have a problem w/NOT including THE REST OF THE WORLD into these financial scenarios.
i also don't belive what SHOULD be done equates in any way whatsoever to what WILL be done but that's my own philosophical conundrum... bring back the D-mark!
heard that Morgan Stanley bonds, 8% "guaranteed" rougly par 92 are returning higher than that.... for reasons already well described on this site however.
---
furthermore "world bonds" spread over roughly 50 countries.... 15 month duration?
--
i myself am not up w/bonds much but they seem good! too good???
We need to unwind this thing in orderly fashion as possible. We need our jobs and manufacturing back. We need to live within our means and foreigners need to work on the problems that cause them to invest with us instead of their own countries.
And yeah, I know that means T-shirts might go back to being $20 instead of $5. We've been living in a "fake" economy for too long where the price of real things is way too low because the Chinese have been playing with the currency.
There's pain ahead but we might get through if we can rip that band-aid off slowly...
Paco Ahlgren has written extensively recently about the Treasury bubble.
experienceiseverything.blogspot.com
Here is a communist country, that has made its enemy into an indentured servant. We quickly forget that they have killed millions of people during the cultural revolution. They have far more effective means of dealing with civil unrest than the western world does.
On the global front, if any country complains about Darfur, China waves their politcal hand as though it were some Jedi mind trick and the matter is forgotten.
On the other front, the last two winters, Russia has reminded the EU that they are more than willing to use energy as a strategic deterrent. Much cleaner than a bomb, but equally effective.
We should not be too puffed up over our own importance. It has dwindled significantly.
In the end, will the USA be divided up like the Ottoman empire was when they could not repay their international debts? Time will tell.
