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Guest Post: What If They Stop Buying Our Debt?
Submitted by Doug Hornig, Senior Editor of Casey Research
I have always depended on the kindness of strangers,” said Blanche DuBois, in the final words of the play A Streetcar Named Desire. Well, don’t we all.
Many citizens probably still cling to the old saw that public debt doesn’t matter because “we owe it to ourselves.” Wrong. Debt always matters. And as for whom we owe it to, it is a lot of kind (or, at least, not yet unkind) strangers.
As recently as 1970, foreign holders of U.S. debt were essentially non-existent. But their slice of our obligation pie has steadily increased, especially over the past two decades, until now foreign governments and international investors hold about 35% of Treasuries, as the following chart reveals.
Of about $11 trillion in U.S. debt, foreigners have about $3.8 trillion, with China in the lead at nearly $1 trillion and Japan not far behind at around $750 billion.
Most likely, though, this trend has already leveled off. The Chinese, Japanese, Russians, and Indians have openly announced their decision to cut back on further purchases and existing holdings of U.S. government debt. Beyond that, the source of funds previously allocated to their purchases -- trade surpluses -- has declined sharply with the recession. As a consequence, going forward, foreign buying is more apt to shrink than increase.
While foreigners are continuing to show up for the record-sized Treasury auctions, it’s due to the dollar retaining its status (albeit shakily) as the world’s reserve currency. But they have become quite cautious, generally investing towards the front end of the yield curve, which is a vote of no confidence in the buck’s future. As the chart below illustrates, sales of long-term bonds to foreigners are way down.
So what does all this mean?
It means that a big chunk of our prosperity during the past twenty years was due to a trade deficit that put billions of dollars into the hands of foreigners, who then turned around and bought Treasuries with them, helping the U.S. government finance its massive deficit spending. That’s over -- and the unwinding process has just begun.
Yet federal deficit spending, far from reflecting this reality, has grown by leaps and bounds. But who will finance it? Let’s extend our first chart out a few years.
As you can see, we project that foreign participation has plateaued. U.S. private domestic investors can probably increase their holdings moderately, now that households are consuming less and saving more, and financial institutions have money to invest in Treasury paper. The agencies and trusts (like Social Security) are really not a part of the equation, but rather reflect programs on “auto-pilot” and quickly headed to the point where they will negatively impact, not help, the deficits.
Adding it all together, even under the most conservative of assumptions, there are simply not enough buyers to cover the accelerating federal deficits. That leaves the lender of last resort, the Federal Reserve, as the only remaining candidate to satisfy the government’s grotesque appetite for funding. There is no viable alternative.
The Fed will take up the slack in the only way open to it, by printing money out of thin air and exchanging it for promises from the Treasury. That means an escalation of monetary inflation and, somewhere down the road, serious price inflation as well. We don’t know exactly when that will happen, only that it must.
The editors of The Casey Report have been alerting subscribers to this very possible scenario for quite some time. If foreigners stop buying U.S. government debt, the whole house of cards will come crashing down. But you can do a lot to protect yourself financially – run with the trend instead of swimming against it. Find out more about the accurate predictions of trend hunter Doug Casey and his team, and how to profit from them… click here.
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Excellent hard hitting financial journalism. It's as woefully disastrous to monitor the staggering herculian level of US debt rollover reloads scheduled for 2010 at nearly 25% of total on balance sheet net redemption of nearly $2.75 trillion before the addition of the 2010 budget deficit gap. The truly terrifying but seldom disclosed risk is that in addition to significantly and publicly reducing their net holdings, foreign intermediaries with the exception of the Fed are racing to ratchet down their net average debt-to-maturity or duration on their foreign currency portfolios. This decision has much less to do with long term interest rates than it does with waning confidence in the dollar. Rightfully so. Either way, buckle up and enjoy the ride.
For most of the people in the world, I do not think the ride will be enjoyable, buckled up or not.
If foreign countries stop buying our debt, yields will rise and domestic buyers will incrementally increase treasuries in their portfolios. This will compensate for some of the slack.
At the same time, the federal, state, and munis will go on a well-needed austerity budget because there is no other alternative. Mind you, "austere" only compared to the current insane levels of government spending we now burn through.
Ultimately a stable fixed point will be achieved. And we'll all be better for it.
I still believe there is more pent-up demand available from a possible migration from risk assets than most people think.
The open questions, though, is (a) how high will rates need to go on the risk-free Treasury?; and (b) how much of a risk premia would need to be imbedded in instruments like corporate bonds and equities to meet the demand that's needed?
While a stable point may well be achieved, the result may well be more bankruptcies and even higher unemployment.
Those are awesome questions for which I don't have the quantitative answer. You are totally right about derisking. We are in an equity bear market and I don't believe we've seen the lows. This and other demographics say the US is rolling into credit big-time. QE is vanity and it won't endure.
Re: yields, I don't think econometric models are reliable, because the last 25 years are so ginned-up. It's best to view things from a long-term perspective and guess for mean reversion with short-term overshoot. I know that US bond auctions have failed many, many times before. What is of concern is auctions failing over and over in rapid succession. That's pain time.
I was a bit flippant in the "happily ever after" tone. I know that this is probably going to challenge our national character like nothing before it. But man, we're living a debt-soaked illusion, and debt is the master of slaves. I refuse to believe decent, reasonable Americans can't avoid an apocalypse.
That's an absolutely excellent point, and one that I would agree with.
Consequently, another way to look at this is that the Fed is playing China, Russia and India as the newbie suckers that they are.
Right now, when Treasuries are real cheap, they not only aren't buying, but are also selling Treasuries.
If/when there's a crisis, you'll see a flight to the dollar and Treasuries. If/when derivatives need to be unwound, there will be serious upward pressure on the dollar. Gold will fall, too, in order to raise liquidity.
In short, the BRIC nations are all buying high and will be selling low if there's a crash.
And the Fed will be paying negative interest on Treasuries once again, as has happened twice this past year, when fear grips the markets.
Welcome to modern geo-political finance.
Do you really think the world is like what it was 30 or 40 years ago? Back then, countries could run to the dollar, but that's a big stretch today. First of all, they can go to the Euro. But the bigger point is that the US has sunk dramatically and the other countries have progressed substantially, so what is the point?
As an example of this, watch some documentaries of places like Shanghai or Bombay or Rio from, say, the early 1960's, and compare them to NYC from that time. Then travel to those places today. Maybe I've spent too much time in Asia, but I see a crisis as a good reason to get more money out of dollars. The US looks good in a world of Cubas or Hondurases, but not if there's a Brazil or Singapore available. Also, the rumor throughout the political and business worlds that I'm familiar with in East Asia all say that they've largely stopped buying US paper, and it's just various frauds and fronts doing it to keep the dumb Americans deluded till things get ugly.
I judge things based upon reality. And the reality of the situation has shown itself twice in the past year; even as recently as last week.
When there's fear, people rush to the dollar.
It ain't Bombay or Shanghai that people look to for safety.
I don't know what you use to make your own judgements, but I'll take modern reality any day.
I'm glad you've patented reality. A lot of that rushing to the dollar you refer to wasn't for safety regarding WWII, it was because of contracts unwinding. If your reality is that the Russians and Chinese will be taught a lesson in geo-political warfare by something causing a strenthening of the dollar, I think you are mistaken. They may be taught reality by some convenient events messing them up, but those will come out of the military-intelligence apparatus of the US.
In any case, you pays your money and you takes your chances. My bet is the US Empire will run off the rails within three years.
I would estimate within 5 years. But the non-reserve countries will be hit harder, due to lack of credit.
In any case, the difference between our arguments boils down to mine being based upon how the markets have provem themselves to react. Yours is simply based on conjecture and wish fulfillment.
Good luck with your bets.
I hate government debt because it just muddies the financial conversational waters. Life would be so much easier with sound money. Well I can dream can't I.
Its interesting to consider tying up your capital buying US Treasuries, especially anything two years out, in the current world financial climate. You talk as if the credit rating of the US is AAA. At this point in time, under the existing fiscal and monetary policies and actions, the US credit rating should be closer to junk.
With your capital you can buy any investment you want. You can buy a commodity like gold, or an industrial commodity like copper, or part of a company that makes cheese cake, or part of any other company around the world.
But, before we jump to conclusions, lets look at the virtues of US Treasuries.
At this time the US governments main product is uncontrolled debt. The US Government is so poorly operated that it cannot balance its budget (maybe 2 out of the last 20 years). Its central bank can not even effectively regulate member banks on the brink of insolvency. The only industry really supported and protected is financial (during time of war the military), not manufacturing or farming. It is so bad at stopping fraud that criminals, rather than rob banks, rob medicare.
OK don't believe me just take a look at the US balance sheet, best to look at the accrual version, and if you are really brave look at the latest FED balance sheet.
So think about where you want your hard earned money to go.
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Consider having your money work for you, and you want to pick the most talented management team. The team that can create value and grow assets, a team that has intrinsic value.
This is not the US Government.
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The term yield only makes sense when begged to something of stable value. If Treasury yields get too high we will not be able to scrub our debt without issuing more debt, that will cost more interest. At some point we will be just paying interest, although I do not think the dollar will last this long.
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"Ultimately a stable fixed point will be achieved. And we'll all be better for it."
The equilibrium you speak of is not viable with the current trends. If we wait for this stable fixed point the country will be in a prolonged depression. The government must act and act quickly if we wish to protect the dollar and maintain some decent average standard of living.
Mark Beck
We are in complete agreement. Current trends are unsustainable, so they'll change. Hopefully in the ways I indicated.
Treasuries aren't the best investment in the world. I won't argue with you there. I looked at the issue from the perspective of existence. Economic institutions will implode or atrophy, but that doesn't mean everything will be wiped away.
The treasury market isn't going anywhere, default/inflation event or no. Every state needs a treasury market and will protect it with everything it's got. With all our flaws, we got a lot of punch left. I bet even George Orwell's Oceania had a functioning treasury market.
World currencies that reflect fundamentals and interest rates that rewarded rather than screwed depositors is probably the best possible scenario for us, as system implosion is inevitable. The idiots running the show right now will not let that happen.
With unemployed at 10-16%, record deliquencies, and credit imploding, there's probably going to be another demand shock and massive bank insolvencies. Treasuries with a coupon certainly aren't the worst investment, no?
If Benny starts dropping dollars from a helicopter (and not stuck in the banking system), I will go all-in with inflation trades.
will there be any reward for the survivors?? will the system just implode to the point where all the avg joes basically have to declare BK before it resets??
does the world need a massive war/plague to save the economy?
Every joe just needs to get their shit in order and depend on themselves instead of the government for a change.
People here don't realize just how pathetic Obama looks to the Chinese people. Constantly begging for them to keep buying treasuries to bail out our ass. It is pathetic.
You and I are our sons don't need any damn wars or plagues to fix anything. We need to look out for ourselves and keep a low profile.
Actually, we've produced balanced or surplus annual budgets for 3 out of the last 40 years, and the last decade in which we had more balanced/surplus years than deficit years was the 1950's (following two decades of deficits). The Anglo-American permanent (and growing) debt model is over 300 years old and will be going strong long after everyone currently alive is six feet under.
The permanent debt model came into existence at Bretton Woods, courtesy of the Keynesian model. It's a Faustian bargain, unfortunately. It will end badly.
"Surpluses" during the Clinton administration?? Look at this:
http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo4.htm
The national debt increased every year during the Cinton administration.
Can you say "off budget items"?
Or better............."Enron accounting in Washington"?
they won't. they need a strong dollar or else it hurts their exports. maybe they increase?
Don't just think of this as an American problem. If foreigners don't buy our debt, their screwed as well. It's not just us, it's the world. Global depression.
Seems like we're doing pretty well in the race to the bottom...the 'American problem' is that we're coming up on a tipping point where the foreigners are looking to cut their losses.
In all seriousness, we are the (financial) world. Who's going to buy all those Chinese trinkets if not us? The pain will be shared equally, if not more by the ROW.
IMHO, the Chinese,,,,,,,,,,,,,,,,,,,
Their needs (immediate and future), is more than capable of taking everything they make, or want to.
The only issue they have is finding work for the 150 million roaming around with no jobs.
True enough. That's part of why China has been embarking on so many bilateral yuan-denominated contracts around the globe lately.
My understanding is that the Chinese have more capital and production capacity than the US, and they are not a debtor nation. They'll feel pain, but they're in much better shape to rebound than the US is.
Even their gov't tells them to play the gold&silver bull market while our gov't tells us to spend, spend spend! to save the economy.
If only this were true - alas this is nothing but rumour borne of one or two neutral, brief boob-tube broadcasts. Great news for gold-bugs though, given there is still millions upon millions of middle-class Chinese yet to buy into the gold bull-market.
Damnit, if you're going to issue a doomatic judgement, at least use the correct word(s), "they are".
much zh love though.
Nice catch and love is always appreciated. Guess I was typing too fast.
Actually, We dont give a shit. Its your (USA) problem. Fuck off or burn.
Whatever
Sincerely
The World.(minus China)
CB,
Unfortunately, it's not just the USA's problem.
Every country on the planet using a fiat currency, will be in a real pickle when the Golden Goose dies.
Yes .... key word being fiat
At least to me, that has been the central issue... how does this ballooning deficit get financed?
Up to this point-- even with the USD down 20% and yields down across the term structure-- there appears to still be decent foreign demand of Treasuries. Why? I don't know. Perhaps Japan sucks worse and China needs exports. But auctions are getting done at VERY LOW rates.
Given the path we are taking, when does it end? I thought it would have ended weeks ago, in all honesty. I gather it starts ending when the Treasury auctions hit major fail.
We can (and will likely) do back down the path of money printing. But there needs to be real deleveraging and a massive liquidation of assets in the private sector to go with the money printing. Otherwise, we are just paving our society and its out of control debt service on a road to oblivion.
Default is a viable alternative... it's just not a desirable one. Well, unless you like the prospect of fighting a world war.
The US is going to be put into an IMF 12 step program.
Young, soft females will be one of the primary exports. They've been doing that on a very, very small scale for years - headed to Hong Kong and who knows after that.
Buddy of mine used to work armed contract security for a Northwest city near Seattle with an airport that did flights over there. They used to bust couples doing whatnot around the end of the runway - must have been romantic?
Anyway, there was this white van parked out there one evening. They approached, knocked, and got nervous answers to opening the rest of the vehicle: full of cocaine with some young things handcuffed to a rail - out of their minds..
Apparently it was common practice to get customs approval and then load up at the end of the runway. Zoom!
QE X will be coming.
... not IF but WHEN ....
Default we must.
Step devaluation of scale we must.
Choose your path or get pushed there.
Destination is the same.
Foreigners freed up Americans to own stocks, real estate, jet skis. It is not guaranteed that less foreign buying equals Fed printing. Americans could reduce their demand for stocks, real estate and jet skis, and buy Treasuries instead. It happened in Japan...
Social Security started running a deficit several months ago due to unemployment and that was at a much lower unemployment number, so that particular deficit situation is escalating rapidly....hut hey.......
Its all bad....no wait...good...I meant good
AndyC
Eh. New Golden Jackass:
http://www.stevequayle.com/News.alert/09_Money/091119.gold.market.breakd...
gold back over 1150 now
Buy gold!
No buy dollars and cut it with a printing press. Buy heroine and cut it with whatever they cut heroine with. Buy gold and cut it with tungsten. Cause we have to have every monetary system exactly mimick the drug industry.
Wake up people, the foreign central banks have already stopped buying our debt (except for that which they are swapping out for their current holdings of GSE securities)
The only market left for U.S. debt are the domestic U.S. banks which the FED is accomodating through the massive expansion of its balance sheet. Bank excess reserves are up 42% since August - any wonder why the Treasury auctions continue to be so successful?
If they do not buy US debt, Bernanke will buy all of it.
Peter Schiff's commentary today at europac.net seems relevant.
I like Peter Schiff's thinking. He makes sense to me. So following the appreciation of the Yuan, demand for Chinese exports will fall as US consumers are squeezed for cash. There has to be a base for that contraction since China will remain geared as the primary manufacturer of most needed household products, until that infrastructure is restarted elsewhere. There is some slack in the system for China. They will fall but not to the bottom. The thinking is that other countries will become more competitive as Chinese exports get more expensive, but how quickly can that rebalancing occur? It seems to me, they have the upper hand here at least in the short to medium term.
It seems that they were gaining the upper hand decades ago we were exporting jobs and they were importing them. There is no short term winning or losing for us just long term losses until there is a real shift in the wind.
Nice commentary. Let the Dark Age begin...
comes to mind:
"As regards the US empire, it is already finished. Very few nations have any respect for the US financially or politically. The US is conducting its affairs just like the Emperor who had no clothes. They are bankrupt financially and intellectually but they still believe that they are ruling the world. Don’t get me wrong, I love America and the American people but their country is in dire straits once the current crisis has settled, and it could take at least 20 years as I said in my Newsletter “The Dark Years Are Here”. It could also take longer. Remember that the Dark Ages lasted for 500 years."
- Egon von Greyerz, Managing Partner of Matterhorn Asset Management AG in Switzerland
Again, this a hard asset guy talking his book.
He talks about the U.S being intellectually bankrupt, yet, his "innovative" investing idea is to buy gold.
China will unpeg the Yuan when it makes financial sense for them, and not a second before that.
If they freed it today, and say the Yuan went up 10%, they'd immediately lose $100 Million, just from the devaluation of their Treasuries.
Factor in the hit on exports, and it's well over that number. There would be economic problems throughout the country.
Could they withstand it? Probably yes, today. Probably not two years from now. But what matters is today, alas.
Let's not forget that Schiff is talking his book. His company is called Europacific.
He conveniently fails to point out that only a few million people in China have benefited from American over-comsumption. Unfortunately, that country has a population of 1.3 billion. Even if China drops the peg, their currency isn't going to rise so much that factory workers will become instant millionaires.
presumably it should increase the purchasing power of all Chinese, that is if they consume any imported goods.
Yeah, but will it do so to the point of being life changing? And, the Chinese have based their economy on merchantilism. They don't want to use anything imported, if possible.
My main issue with Schiff is that he takes a magnifying glass to the problems of the U.S, but rose-colored glasses to the rest of the world.
Nice infomercial at the link. Very subtle:
He has been spotting so many trends that some people find it uncanny.
Learn how you can profit from the...
NEW Predictions
from the
Nostradamus of Investing
That is a bit thick... Why not just say the Christ of Investing and get it out of the way?
I was an avid reader of Casey's Crisis Investing newsletter in the early '80s. Casey is a fine writer and I still value his viewpoint, but Casey had his readers heavily invested in PMs, and junior gold and silver mining stocks, waiting for a financial apocalypse that would come because of the S&L crisis, among other things. There is nothing new under the sun. He especially warned readers to stay away from the blue chips (the true gyps, he called them) as those would crash badly. The crash Casey predicted finally came on black Monday in '87--the worst stock market crash in US history. The 'true gyps' lost much value, but quickly recovered and went on to higher highs. Thirty years later, most of them are still worth more than folks payed for them back then. Most, if not all, of the junior mining stocks Casey recommended are completely worthless today. If you bought gold and silver back then you lost 50% to 75% of your money over the next 25 years and are just now breaking even in inflation-adjusted terms. Depending on when you bought, some folks are still waiting to break even in inflation-adjusted dollars.
A financial Nostradamus he's not.
On March 22, 2006, when the gold price was hovering around $550, Doug went on the record saying he was convinced gold were “on the verge of its next big move up, a move I believe will surprise everyone.”??Two weeks later, gold had climbed up to $640.60 – and closed out the year at an average price of $629.79.??Ever since, we have never seen gold below $600 again.
He's been making the same call for 30 years or more, hasn't he? Starting with his best selling book in 1980, the one that outsold Milton Friedman and Carl Sagan!!!!!
I do not want to sound bitter, I have "freely" enjoyed ZH for months. I must say, I am slightly disappointed to find a news article (which I enjoyed reading) contain a link (or advertisement) to a paid-subscription newsletter. I have found the clear and forward way ZH presents news has elevated them above reproach. I hope this does not lead to an erosion of that status.
Otherwise, good job and keep up the great work.
No happy ending to this cliff-hanger. It is hard to think of a scenario that plays out without pain for the selfish US consumer.
I'm always cautious whenever someone tries to sell me something. Regardless of the words I've read, his website is reminiscent of "6 Weightloss Strategies that REALLY work!" or "3 ways to WORK FROM HOME from the Internet!". This only tells me he is trying to profit from hype. It would do ZeroHedge good to not affiliate themselves with such businesses, provided they want to stay reputable.
In this interview Bill Fleckenstein discusses where we are in the stock market rally, gold, gold as money, the Fed, money printing, the economy, investor sentiment in gold and silver and the mining shares, getting rid of the emotion in investing, the global Dollar carry trade, disastrous bubbles, another train wreck, the currency situation and more.
http://tinyurl.com/yf49bv5
Bases on the scenarios described above, what should one invest in? short treasuries?
silver 1oo 0z bars 1 oz coins bag of junk silver solar panels inverter chickens woodstove bicycles rice beans seeds gardening tools mason jars chainsaw
Tyler or Doug Hornig,
I was under the impression that in 2006, when our government insisted that is was suddlenly useless and so very "unimportant" to publish M3, that ownership of treasuries by foreign entites had grown beyond 50% and so if it is down to 33% now, that says alot, and it makes me feel that there may be something wrong with the extrapolation?
Just wondering...
It is worth noting that as long as we buy their products and pay them in dollars, they'll just need to buy our debt to invest it. But now that our economy is weaker, they make less of it to buy our Treasuries. That is why vigorous economic growth at all costs is the only solution out of this mess.
admin
http://invetrics.com
"What if they stop buying our debt?"...........then the peg is dead.
So fucking bored with this already.
Listen to what we are telling you... believe everything that we say. Please get bored with the SOS so that we can keep doing it. Message from the powers that be, paid by the taxpayers.