Federal debt
Large foreign holdings of U.S. debt can pose a risk to the U.S. economy, but, so far at least, we have benefited. The "carry trade," borrowing undervalued currencies, mostly the Japanese Yen, and investing it in U.S. debt has been around for a long time. When the dollar is falling, why are Japan and China continuing to hold such large positions? The short answer is we are their largest customer, and they are struggling to hang on to their export business with us.
Japanese holdings of Treasury debt as of the end of February totaled $586.6 billion, down 5.8% from last June. China increased its holdings over the same period from $477.3 billion to $486.9 billion, a 2.0% increase. Considering the dollar has depreciated since then by 9.6% against the Yen and by 8.1% against the Yuan, that's quite a loss the Japanese and Chinese have suffered in the value of those holdings and of the interest income streams they yield.
Stan's post this morning brought to mind the old joke with the punchline in the title of this post. When there's a panic, you need to make sure you are at the front of the line to get out. Japan is the largest external holder of federal debt, but it's not the only one. The financial meltdown scenario is one I posted about last year at Vox Baby, in response to a poorly elocuted (though certainly not discredited) speech given by Senator Clinton after a stock market selloff. Here's what she said:
This report this morning from Bloomberg about Japanese investors dumping, or at least not buying more, U.S. Treasuries, is extremely worrisome, especially if it's followed by similar thoughts and actions by the Chinese and other big buyers.
I've been telling audiences for several years that this was inevitable if the U.S. kept flooding the market with additional debt and the value of the dollar kept depreciating. The response typically was an Alfred E. Neuman-like "what-me-worry?" approach. At least one person usually said that the Chinese in particular had to keep buying Treasuries because they couldn't afford for the U.S. -- their biggest customer -- not to be able to continue to buy Chinese products.
That may be true if the buyer is the Chinese government, or any fund controlled by the government. But as this article points out, the initial decision at least may be made by private sector investors rather than governmental entities who are far less concerned with the big picture than with maximizing their own profits.
An economic stimulus is all the rage in Washington these days. The president says he is seriously considering one and may reveal it in his State of the Union Address; congressional Democrats are talking about one of their own that could be announced before the SOTU occurs.
It wasn't that long ago that I was getting lots of calls from bond traders on Wall Street who needed career counseling. This was 1998-2001 when, for the first time in 70 years, the federal government had run 4 consecutive budget surpluses and there was talk about paying off the national debt by the end of the decade.
Bond traders rejoice; you're about to have a lot of product to sell.
The Treasury said last week that the government would reach its borrowing limit by October 1.
