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Move Over China: Beijing Sells Whopping $34.2 Billion Treasuries In December As Japan Becomes Largest Official Holder Of US Debt

Tyler Durden's picture





 

Gradually we are getting confirmation that Chinese "posturing" about offloading US debt is all too real. The most recent TIC data confirmed the Treasury's greatest nightmare: China is now dumping US bonds. In December China sold $34.2 billion of debt ($38.8 billion in Bills sold offset by $4.6 billion in Bonds purchased), lowering its total holdings $755.4 billion, the lowest since February 2009, and for the first time in many years relinquishing the top US debt holder spot to Japan, which bought $11.5 billion (mostly in Bonds, selling $1.4 billion Bills) bringing its total to $768.8 billion. Also, very oddly, the surge in UK holding continues, providing yet another clue as to the identity if the "direct bidder" - as we first assumed, these are merely UK centers transacting primarily on behalf of China as well as hedge funds, which are accumulating US debt under the radar. UK holdings increased from $230.7 billion to $302.5 billion in December: a stunning $70 billion increase in a two month span. Yet, with the identity of the UK-based buyers a secret, it really could be anyone... Anyone with very deep pockets.

We will go through the TIC data in much more detail later; for now here is the official press release.

February 16, 2010
tg548

TREASURY INTERNATIONAL CAPITAL DATA FOR DECEMBER

WASHINGTON
– The U.S. Department of the Treasury today released Treasury
International Capital (TIC) data for December 2009. The next release,
which will report on data for January 2010, is scheduled for March 15,
2010.

Net foreign purchases of long-term securities were $63.3 billion.

  • Net foreign purchases of long-term U.S. securities were $82.2
    billion. Of this, net purchases by private foreign investors were $62.6
    billion, and net purchases by foreign official institutions were $19.6
    billion.
  • U.S. residents purchased a net $18.9 billion of long-term foreign securities.

Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been $50.9 billion.

Foreign holdings of dollar-denominated short-term U.S.
securities, including Treasury bills, and other custody liabilities
decreased $67.7 billion. Foreign holdings of Treasury bills decreased
$53.0 billion.

Banks' own net dollar-denominated liabilities to foreign residents increased $77.7 billion.

Monthly net TIC flows were
$60.9 billion. Of this, net foreign private flows were $82.0 billion,
and net foreign official flows were negative $21.1 billion.

 


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Tue, 02/16/2010 - 10:40 | Link to Comment 10044
10044's picture

Question is, what they've bought with the money instead? Fannie paper??!

Tue, 02/16/2010 - 10:44 | Link to Comment Boop
Boop's picture

Swiss Francs?

Tue, 02/16/2010 - 11:01 | Link to Comment LoneStarHog
LoneStarHog's picture

Gold!

Tue, 02/16/2010 - 15:15 | Link to Comment Anonymous
Tue, 02/16/2010 - 16:25 | Link to Comment Anonymous
Tue, 05/17/2011 - 02:06 | Link to Comment Karston1234
Karston1234's picture

This is really very interesting to say the least.
Doctorate Degree
Online Nursing Degree

Tue, 02/16/2010 - 12:03 | Link to Comment Anonymous
Tue, 02/16/2010 - 14:12 | Link to Comment Anonymous
Tue, 02/16/2010 - 22:50 | Link to Comment Anonymous
Tue, 02/16/2010 - 15:19 | Link to Comment Anonymous
Tue, 02/16/2010 - 10:43 | Link to Comment MarketTruth
MarketTruth's picture

Hmmmm UK-based you say... very deep pockets... perhaps the House of Rothschild? After all, they do own a portion of the United States private printing press owner Federal Reserve. Maybe it was the Warburgs (Germany) or the Lazard Brothers?

www.save-a-patriot.org/files/view/whofed.html

Tue, 02/16/2010 - 10:51 | Link to Comment asdf
asdf's picture

maybe the china foreign office?! The PBoC has offices in the UK and HK. They buy through their foreign offices to "hide" (ok, it's not really a secret) that they already own more than 3 trillion dollars instead of "only" 2.

Tue, 02/16/2010 - 15:39 | Link to Comment Anonymous
Tue, 02/16/2010 - 10:47 | Link to Comment Bylinka (not verified)
Tue, 02/16/2010 - 10:55 | Link to Comment Shameful
Shameful's picture

That's what bothers me about China being a buyer secretly, I can't fathom a reason. They already have enough $$$ to be used as a weapon if they want, their position is so large it will be hard to unwind with causing problems, and they know the dollar is a long term loser because of American fiscal and monetary policy.

I'm thinking it's more likely to be a central bank like the Fed. After all it was reported on this website the huge amount of treasuries they purchased last year maybe they are trying to change it up to keep the Tylers and Marlas of the world off the track?

Tue, 02/16/2010 - 11:01 | Link to Comment Bylinka (not verified)
Tue, 02/16/2010 - 12:09 | Link to Comment Tethys
Tethys's picture

Only reason I could think of would be to provide an anonymous weapon - they could sell off their accumulated under-the-table holdings all at once to provide an economic blow at an opportune time while whistling innocently and pointing out that their overall known holdings did not decrease significantly.  This would make it harder for the US to justify a response to the attack, or know who the attacker was.

Seems a bit tenuous given the money trail pointed out by nonclaim's comment below, so I'm guessing the fed as well.

Tue, 02/16/2010 - 14:56 | Link to Comment Anonymous
Tue, 02/16/2010 - 11:07 | Link to Comment nonclaim
nonclaim's picture

Do not assume China (or anybody else) can move this much money and stay hidden. It may not be officially known but it is not unknown as money leaves a distinct trail and nobody, in their right mind, would participate in a trade with an unverified/untrusted party, the clearer specially.

And what is the point of China being an open seller and a hidden direct buyer at the same time?

It is a way to "roll" into instruments with different term dates.

Tue, 02/16/2010 - 13:49 | Link to Comment Anonymous
Tue, 02/16/2010 - 18:08 | Link to Comment Anonymous
Tue, 02/16/2010 - 14:09 | Link to Comment thomasstreet
thomasstreet's picture

This deserves a repost: PAUL CRAIG ROBERTS: AMERICA—A COUNTRY OF SERFS RULED BY OLIGARCHS

The media has headlined good economic news: fourth quarter GDP growth of 5.7 percent ("the recession is over"), Jan. retail sales up, productivity up in 4th quarter, the dollar is gaining strength. Is any of it true? What does it mean? Or is it all a lie

The 5.7 percent growth figure is a guesstimate made in advance of the release of the U.S. trade deficit statistic. It assumed that the U.S. trade deficit would show an improvement. When the trade deficit was released a few days later, it showed a deterioration, knocking the 5.7 percent growth figure down to 4.6 percent. Much of the remaining GDP growth consists of inventory accumulation.
Resd the rest here

Tue, 02/16/2010 - 15:53 | Link to Comment Anonymous
Tue, 02/16/2010 - 10:59 | Link to Comment Anonymous
Tue, 02/16/2010 - 12:11 | Link to Comment Anonymous
Tue, 02/16/2010 - 12:58 | Link to Comment WaterWings
WaterWings's picture

It's a big stare down with a knife at each other's throat. Nobody wants to blink (collapse) first. 40,000,000 foodstampers, and growing, with no job prospects on the horizon...we should have collapsed already. The Chinese are facing a major slowdown...with workers returning to bleak agricultural life again...civil unrest is already ongoing (brutal crackdowns and non-existent press coverage)...

There is no recovery...only bankers pulling down windfall profits each quarter. This is, and always has been, a typical prelude to war. Winner takes all?

http://www.youtube.com/watch?v=Bv4UqrWV2_U

Big (warmongering imperial) kid on the block stumbles...put your money on a food fight.

Tue, 02/16/2010 - 11:02 | Link to Comment Crab Cake
Crab Cake's picture

China's military controls that country, and did not the Chinese military plead to the world to sell treasuries?  Did we expect otherwise from them?

"confirmed the Treasury's greatest nightmare"

We have been "softly landed" on a precipice that is giving way no matter what anyone says or does.  It might be today, tomorrow, or five or ten years from now, but the default station destiation is clear in the distance.

Jubilee please, thank you.

Tue, 02/16/2010 - 11:02 | Link to Comment Zexe
Zexe's picture

China has enough of US debt, I don;t think they want more. For sure the direct bidder is a central bank, most likely the Fed, buy debt. Because, little by little, in a not too distant future, no one will want US debt anymore...the Fed will be the only one buying UST. Regardless, deflation will prevail, US cannot escape liquidity trap. 

Tue, 02/16/2010 - 11:06 | Link to Comment Crab Cake
Crab Cake's picture

"Regardless, deflation will prevail...."

It does feel like we are rounding another bend on the spiral of deflation, what with the sovereigns and CRE ready to default, no?

Tue, 02/16/2010 - 11:11 | Link to Comment asdf
asdf's picture

"China has enough of US debt, I don;t think they want more."

 

they don't buy treasuries because they like them, they buy it because they need to recycle their surplus somehow. As long as they have a huge trade surplus with the US, they will buy treasuries.

Tue, 02/16/2010 - 13:14 | Link to Comment DosZap
DosZap's picture

Since their SO  WISE, I  would be easing out ASAP..................

Buying more, would equal  Brain Dead.

The secret DEEP  POCKETS, is none other than ther Fed.........

Just a way  to monetize the debt, under the radar.

Thu, 02/18/2010 - 03:35 | Link to Comment Anonymous
Tue, 02/16/2010 - 11:04 | Link to Comment Anonymous
Tue, 02/16/2010 - 12:01 | Link to Comment Oso
Oso's picture

the near complete absence of ANY volume pretty much means that the majority of people dont really believe this rally.  But, because of the perverse incentive to be invested, idiot money managers wont get out until everyone else is forced to.  It doesnt matter if you lose peoples' money, as long as everyone else is losing it at the same time.

 

To this point, however, doesnt unloading treasuries seem to be in-line with a currency revaluation...?  You'd want to buy back as many yuan before revaluing upwards, no?

Tue, 02/16/2010 - 11:05 | Link to Comment Anonymous
Tue, 02/16/2010 - 11:05 | Link to Comment Cyan Lite
Cyan Lite's picture

Doesn't this mean a weaker dollar, and thus green shoots?

Tue, 02/16/2010 - 11:09 | Link to Comment Anonymous
Tue, 02/16/2010 - 12:50 | Link to Comment loki
loki's picture

Up $25 already today....  was hoping, praying for the "9" handle to back up the truck but no such luck. 

 

Please please please, just one giant dip so I can get a bit more?? 

 

Tue, 02/16/2010 - 12:58 | Link to Comment Anonymous
Tue, 02/16/2010 - 11:06 | Link to Comment THE DORK OF CORK
THE DORK OF CORK's picture

Its the Greeks , Irish ,Portuguese and the Spanish - they are converting their euros into FRNs before their paper is converted into Drachmas , punts ,escudos and pesetas.

Only joking..... I hope.

Tue, 02/16/2010 - 11:40 | Link to Comment bugs_
bugs_'s picture

My thoughts exactly.  No joke.  Perhaps not the
governments but the oligarchs' families.

Tue, 02/16/2010 - 11:08 | Link to Comment Anonymous
Tue, 02/16/2010 - 12:43 | Link to Comment merehuman
merehuman's picture

If i were chinese i would be whistling.

New roads, new cars and more spending power plus a little gold as the state suggests. Yes im a yellow fellow and i own the world. Jusy feeling grateful the long term plan to put the usa down has worked. And our banker friends in the usa were a big help.

Tue, 02/16/2010 - 11:09 | Link to Comment Anonymous
Tue, 02/16/2010 - 11:10 | Link to Comment Alex in SFBA
Alex in SFBA's picture

It's inevitable. US imports dropped by $70 bil a year, almost all of it at China's expense. China, on the other hand, is on the stimulus rampage building train service to nowhere, empty offices and appartments. All of it requires resources, which require dollars. They don't have a choice but to sell their holdings to keep the music going on a little longer..

I beleive the money that doesn't go to China now will easily find it's way to UST. In other words, we're going from this:

US consumer -> China -> UST, to this

US consumer -> UST.

 

Tue, 02/16/2010 - 12:04 | Link to Comment Oso
Oso's picture

exactly.  once all of this is exhausted, then yields will rise permanently.  but not yet.  not yet.

Thu, 02/18/2010 - 03:45 | Link to Comment Anonymous
Tue, 02/16/2010 - 11:12 | Link to Comment Anonymous
Tue, 02/16/2010 - 11:22 | Link to Comment Going Down
Going Down's picture

 

"China is now dumping US bonds"

 

First off, I would not call a 4.5% decline in one asset class "dumping." For a few years now China has been realigning its foreign reserve positions; for USD-denominated assets, the most significant trend is the shift from Agencies to Treasuries (and to a limited extent direct equity investments through its sovereign wealth fund). Because China's accumulated USD reserves comprise a disproportionate share of total FX holdings (around 80% if I remember correctly), it makes perfect investment sense to diversify.

 

In its drive to diversify, you will note a distinct focus on natural resources. Not to say that the USD will be worthless but when a country has $2T to $3T saved, it makes perfect sense to "dump" 4.5% of your paper for commodities, including gold.

 

If and when China truly "dumps" its Treasuries, you will see the price action in markets all around the world. The fall would be simultaneous, explosive even, and no other investor will be fast enough to get out of their positions. Why? Because it would be war.

 

Tue, 02/16/2010 - 11:33 | Link to Comment Cyan Lite
Cyan Lite's picture

Agreed, sensationalist headline...

Tue, 02/16/2010 - 11:58 | Link to Comment Anonymous
Tue, 02/16/2010 - 13:12 | Link to Comment carbonmutant
carbonmutant's picture

 +3

 Chinese selling treasuries is not a problem unless it triggers a failed auction in the US.

 

 

Tue, 02/16/2010 - 15:20 | Link to Comment MarketTruth
MarketTruth's picture

How can the USA have a 'failed' auction when the Federal Reserve has a printing press and low-and-behold a secret entity of 'direct' buyers are now in play?

Tue, 02/16/2010 - 15:29 | Link to Comment carbonmutant
carbonmutant's picture

 If your scenario is right then Chinese selling will never be a problem.

Tue, 02/16/2010 - 11:23 | Link to Comment assumptionblindness
assumptionblindness's picture

Let's face it.  We will never know who was/is behind the UK purchases...the bigger issue is what happens over the next couple of quarters of US debt issuance. 

Wasn't the whole world waiting for the day to come when China became a net SELLER of treasuries?  Well, that day has arrived (rather quietly, too).

It may now only be a short time before a panic rush to the exit begins.  The bottleneck will be reminiscent of front door of The Stationin Rhode Island when Great White lit the place on fire a decade ago.  Just look around, folks.  There are a lot of FAT people who own treasuries.  Thanks to the UK we can move closer to the door before the shout "FIRE!" erupts. 

Tue, 02/16/2010 - 11:38 | Link to Comment Anonymous
Tue, 02/16/2010 - 12:36 | Link to Comment Anonymous
Tue, 02/16/2010 - 11:30 | Link to Comment Anonymous
Tue, 02/16/2010 - 11:31 | Link to Comment Anonymous
Tue, 02/16/2010 - 11:33 | Link to Comment AnonymousMonetarist
AnonymousMonetarist's picture

Of course you are correct that UK has served as a proxy for China and Carribean (hedgies).

One reason China would buy in secret would be to offset the general Chinese public opinion that U.S. debt is toxic and that the U.S. is setting up the Chinese for a big loss. Conspiracy theories in China towards U.S. intentions is a mainstream pop culture phenomena, and is often parroted in private by top officials.

Tue, 02/16/2010 - 11:56 | Link to Comment hedgeless_horseman
hedgeless_horseman's picture

The UAW/O'POTUS heavies may want to lay off the U.S. auto safety inspectors and let some of Toyota's Alar apples through, or the Jap.bizs may forget that they hate the Chi.coms more than America. 

Maybe we don't worry much about a security threat from either the Chi.coms or the Jap.bizs because we are 2-1-1 against their conference?   

Tue, 02/16/2010 - 11:41 | Link to Comment bugs_
bugs_'s picture

Japan is essentially a GSE.

Tue, 02/16/2010 - 11:59 | Link to Comment hedgeless_horseman
hedgeless_horseman's picture

Agreed.  A big toxic GSE of which even a small appropriately exported portion could make LehBros look like a fart-in-a-wind-storm. 

Asymmetric warfare is a mofo, so it behoves the U.S.gov to keep the game 2 on 1, versus 1 on 2.  O'POTUS's simultaneous foreign policy initiatives of Taiwan/Lhama + the Toyota Alar apple scare presses the Pacific triangle in an bad way.

That said, long or short Korea?

Tue, 02/16/2010 - 13:04 | Link to Comment WaterWings
WaterWings's picture

Long agriculture. It's what Blackrock, Soros, and the Squids are doing over there.

Tue, 02/16/2010 - 11:43 | Link to Comment DaveyJones
DaveyJones's picture

Take the posture idea out to pasture. They will keep disengaging.

Tue, 02/16/2010 - 11:46 | Link to Comment poydras
poydras's picture

In the context of China having to recycle USD, selling $30B in one month seems like dumping to me.

Tue, 02/16/2010 - 11:46 | Link to Comment Anonymous
Tue, 02/16/2010 - 11:48 | Link to Comment poydras
poydras's picture

The UK jump is curious indeed...

Tue, 02/16/2010 - 12:01 | Link to Comment THE DORK OF CORK
THE DORK OF CORK's picture

Yes once certain people offload their Sterling positions there could be a major fall in that currency .

Watch this space.......

Tue, 02/16/2010 - 11:54 | Link to Comment DRju
DRju's picture

This has deep ramification if it continues. WHo will be next? The door locked

Tue, 02/16/2010 - 12:29 | Link to Comment Anonymous
Tue, 02/16/2010 - 12:58 | Link to Comment IveBeenHad
IveBeenHad's picture

 

DONT BE MISLEADING! The largest holder of US Treasury is the Social Security Trust w/ almost 3 trillions dollars!!!! China is the largest foreign holder. Guys I've said it once and i'll say it again that America just owes itself and if need be social security trust will just buy more. look to it as the mysterious direct bidder. Geeeeeeez.  I do not like to be mislead and this title is misleading.  

 

http://www.ssa.gov/cgi-bin/investheld.cgi

 

Tue, 02/16/2010 - 13:06 | Link to Comment WaterWings
WaterWings's picture

Typical. High on your own supply. But we've seen this with every fiat currency - always ends the same - we just never know how much is left in the hourglass.

Tue, 02/16/2010 - 13:09 | Link to Comment THE DORK OF CORK
THE DORK OF CORK's picture

Hey maybe yee guys over there will started saving again  - a strange idea I know but you never know it could work.

Tue, 02/16/2010 - 13:23 | Link to Comment hedgeless_horseman
hedgeless_horseman's picture

Again?  Not any more likely than wee Irish sobering up and getting UE under control.

Tue, 02/16/2010 - 13:32 | Link to Comment THE DORK OF CORK
THE DORK OF CORK's picture

A American who thinks he is a alcoholic can solve his problem very easily - move to Ireland.

Tue, 02/16/2010 - 13:26 | Link to Comment Anonymous
Tue, 02/16/2010 - 23:28 | Link to Comment Anonymous
Wed, 02/17/2010 - 02:46 | Link to Comment Tethys
Tethys's picture

I'm definitely not an expert (and somewhat prone to conspiracy theories, or, more kindly put, looking for an underlying pattern or cause to seemingly unrelated or puzzling events), but your point was clearly laid out and made me think.

Isn't it relevant to your argument that they sold $38.8 billion, but only bought $4.6 billion in bonds?  It seems to me that the goal was to dump $34.2 billion in debt, and the bond purchase was just misdirection - e.g., to give the impression that they have confidence in the long term prospects  of the US while unloading as much debt as they can.

When you find something like this that clearly doesn't make sense, it may be an indication that one or more of your underlying assumptions are wrong.  This may be the case if you assume that the Chinese believe they have a chance in hell of ever being fully repaid on their longer term investments in the US.  Sure they threw away another $4.6 billion, but they have to keep markets calm while they unload as much of their shorter term stuff as possible - some might consider that a wise investment and the reason they went for the longer end of the curve (maximum bang for the buck in terms of conveying confidence).

For those of us who tend towards conspiracy theories, once you take in the possibility that the Chinese have essentially written off a huge portion of their investment, it's fun to guess at the end game.  My current favorite theory du jour is that they are selling the short term stuff that they feel they still have a chance at, misdirecting with long term stuff, and buying a chunk under the table via the UK.  When the time comes, they will sell off the under-the-table lot at a strategic point, thereby causing a failed auction and the end of the US as we know it, with no smoking gun pointing to themselves as the culprit.  Then they de-peg their currency, take the loss on remaining outstanding longer-term treasuries, and slip into their new role as dominant superpower.

Of course my lack of in-depth knowledge of the markets and what is truly going on probably made that last paragraph a waste of time for anyone who read it. Please accept my apology in advance.

Wed, 02/17/2010 - 15:56 | Link to Comment WaterWings
WaterWings's picture

Either way it was a good read. Better to get the idea out there then to worry if some asshole like me doesn't agree.

Thu, 02/18/2010 - 01:09 | Link to Comment Anonymous
Tue, 02/16/2010 - 13:31 | Link to Comment Slewburger
Slewburger's picture
"Japan Becomes Largest Official Holder Of US Debt"

Keyword official.... I'm not worried. The Fed picked that crap up without blinking. The black hole is looming.

Tue, 02/16/2010 - 13:34 | Link to Comment Gordon_Gekko
Gordon_Gekko's picture

Sell China, SELL!

Tue, 02/16/2010 - 13:51 | Link to Comment Anonymous
Tue, 02/16/2010 - 14:07 | Link to Comment thomasstreet
thomasstreet's picture

This deserves a repost: PAUL CRAIG ROBERTS: AMERICA—A COUNTRY OF SERFS RULED BY OLIGARCHS

The media has headlined good economic news: fourth quarter GDP growth of 5.7 percent ("the recession is over"), Jan. retail sales up, productivity up in 4th quarter, the dollar is gaining strength. Is any of it true? What does it mean? Or is it all a lie

The 5.7 percent growth figure is a guesstimate made in advance of the release of the U.S. trade deficit statistic. It assumed that the U.S. trade deficit would show an improvement. When the trade deficit was released a few days later, it showed a deterioration, knocking the 5.7 percent growth figure down to 4.6 percent. Much of the remaining GDP growth consists of inventory accumulation.

More than a fourth of the reported gain in Jan. retail sales is due to higher gasoline and food prices. Questionable seasonal adjustments account for the rest.

Productivity was up, because labor costs fell 4.4 percent in the fourth quarter, the fourth successive decline. Initial claims for jobless benefits rose. Productivity increases that do not translate into wage gains Cannot Drive the consumer economy.

Housing is still under pressure, and commercial real estate is about to become a big problem.

The dollar’s gains are not due to inherent strengths. The dollar is gaining because government deficits in Greece and other EU countries are causing the dollar carry trade to unwind. America’s low interest rates made it profitable for investors and speculators to borrow dollars and use them to buy overseas bonds paying higher interest, such as Greek, Spanish and Portuguese bonds denominated in euros. The deficit troubles in these countries have caused investors and speculators to sell the bonds and convert the euros back into dollars in order to pay off their dollar loans. This unwinding temporarily raises the demand for dollars and boosts the dollar’s exchange value.

The problems of the American economy are too great to be reached by traditional policies. Large numbers of middle class American jobs have been moved offshore: manufacturing, industrial and professional service jobs. When the jobs are moved offshore, consumer incomes and U.S. GDP go with them. So many jobs have been moved abroad that there has been no growth in U.S. real incomes in the 21st century, except for the incomes of the super rich who collect multi-million dollar bonuses for moving U.S. jobs offshore.

Without growth in consumer incomes, the economy can go nowhere. Washington policymakers substituted debt growth for income growth. Instead of growing richer, consumers grew more indebted. Federal Reserve chairman Alan Greenspan accomplished this with his low interest rate policy, which drove up housing prices, producing home equity that consumers could tap and spend by refinancing their homes.

Unable to maintain their accustomed living standards with income alone, Americans spent their equity in their homes and ran up credit card debts, maxing out credit cards in anticipation that rising asset prices would cover the debts. When the bubble burst, the debts strangled consumer demand, and the economy died.

As I write about the economic hardships created for Americans by Wall Street and corporate greed and by indifferent and bribed political representatives, I get many letters from former middle class families who are being driven into penury. Here is one recently arrived:

"Thank you for your continued truthful commentary on the 'New Economy.' My husband and I could be its poster children. Nine years ago when we married, we were both working good paying, secure jobs in the semiconductor manufacturing sector. Our combined income topped $100,000 a year. We were living the dream. Then the nightmare began. I lost my job in the great tech bubble of 2003, and decided to leave the labor force to care for our infant son. Fine, we tightened the belt. Then we started getting squeezed. Expenses rose, we downsized, yet my husband's job stagnated. After several years of no pay raises, he finally lost his job a year and a half ago. But he didn't just lose a job, he lost a career. The semiconductor industry is virtually gone here in Arizona. Three months later, my husband, with a technical degree and 20-plus years of solid work experience, received one job offer for an entry level corrections officer. He had to take it, at an almost 40 percent reduction in pay. Bankruptcy followed when our savings were depleted. We lost our house, a car, and any assets we had left. His salary last year, less than $40,000, to support a family of four. A year and a half later, we are still struggling to get by. I can't find a job that would cover the cost of daycare. We are stuck. Every jump in gas and food prices hits us hard. Without help from my family, we wouldn't have made it. So, I could tell you just how that 'New Economy' has worked for us, but I'd really rather not use that kind of language."

Policymakers who are banking on stimulus programs are thinking in terms of an economy that no longer exists. Post-war U.S. recessions and recoveries followed Federal Reserve policy. When the economy heated up and inflation became a problem, the Federal Reserve would raise interest rates and reduce the growth of money and credit. Sales would fall. Inventories would build up. Companies would lay off workers.

Inflation cooled, and unemployment became the problem. Then the Federal Reserve would reverse course. Interest rates would fall, and money and credit would expand. As the jobs were still there, the work force would be called back, and the process would continue.

It is a different situation today. Layoffs result from the jobs being moved offshore and from corporations replacing their domestic work forces with foreigners brought in on H-1B, L-1 and other work visas. The U.S. labor force is being separated from the incomes associated with the goods and services that it consumes. With the rise of offshoring, layoffs are not only due to restrictive monetary policy and inventory buildup. They are also the result of the substitution of cheaper foreign labor for U.S. labor by American corporations. Americans cannot be called back to work to jobs that have been moved abroad. In the New Economy, layoffs can continue despite low interest rates and government stimulus programs.

To the extent that monetary and fiscal policy can stimulate U.S. consumer demand, much of the demand flows to the goods and services that are produced offshore for U.S. markets. China, for example, benefits from the stimulation of U.S. consumer demand. The rise in China’s GDP is financed by a rise in the U.S. public debt burden.

Another barrier to the success of stimulus programs is the high debt levels of Americans. The banks are being criticized for a failure to lend, but much of the problem is that there are no consumers to whom to lend. Most Americans already have more debt than they can handle.

Hapless Americans, unrepresented and betrayed, are in store for a greater crisis to come. President Bush’s war deficits were financed by America’s trade deficit. China, Japan, and OPEC, with whom the U.S. runs trade deficits, used their trade surpluses to purchase U.S. Treasury debt, thus financing the U.S. government budget deficit.

The problem now is that the U.S. budget deficits have suddenly grown immensely from wars, bankster bailouts, jobs stimulus programs, and lower tax revenues as a result of the serious recession. Budget deficits are now three times the size of the trade deficit. Thus, the surpluses of China, Japan, and OPEC are insufficient to take the newly issued U.S. government debt off the market.

If the Treasury’s bonds can’t be sold to investors, pension funds, banks, and foreign governments, the Federal Reserve will have to purchase them by creating new money. When the rest of the world realizes the inflationary implications, the US dollar will lose its reserve currency role. When that happens Americans will experience a large economic shock as their living standards take another big hit.

Tue, 02/16/2010 - 14:12 | Link to Comment caconhma
caconhma's picture

One has to be blind and naive to assume that the USA and China will be able to sort out their geopolitical differences. Consequently, the both sides position themselves for an imminent confrontation.

The wildest card in this game is Russia. Specifically, who will rule Russia and what national interests they will pursue.

As of today, Russia is in a very deep political and economic crisis. Their leaders are more interested in hoarding their loot into foreign banks rather than to care about their own country and its people. On a top of everything, Russia has no real army to protect its territory. All what they could do is to fight 5-million people Georgia. At the same time, close to 100 millions Chinese live in a 50-miles wide and many thousands miles long strip along Russian's boarder. As in the case of the USA and Mexico,  millions Chinese will flood across the Russian boarder from China. Add to it the fact that Russian population is shrinking quite fast.

As for the USA, it is in a midst of its own deep crisis both political and economic. America ruling elite is to corrupt, incompetent, and intellectually bankrupt. Consequently, the USA cannot afford immediate or near-term confrontation with China (the USA are already involved in many wars it cannot win, specifically Afghanistan, Iraq, Pakistan, Somalia, the Muslim world). At the same time, the time is on China's side.

Tue, 02/16/2010 - 14:32 | Link to Comment Anonymous
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Wed, 02/17/2010 - 21:56 | Link to Comment Chaz
Chaz's picture

Yet, with the identity of the UK-based buyers a secret, it really could be anyone... Anyone with very deep pockets.

I call shenanigans!  More manipulation by Englishmen?  On it's surface I'd call more hijinks by the BOE.

Mon, 04/19/2010 - 09:02 | Link to Comment Tom123456
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Fri, 10/22/2010 - 02:30 | Link to Comment Savana
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Thu, 12/09/2010 - 02:37 | Link to Comment william.smith61
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Fed will just print more paper, everyone seems to think that this will end badly, but how?

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Tue, 12/21/2010 - 19:24 | Link to Comment SIM Only deal
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Mon, 01/03/2011 - 00:55 | Link to Comment george22
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This ignores the laws of all-embracing finance. As continued as China pegs the dollar and runs a accepted accounts surplus, it will not be able to selloff ample amounts of US treasuries.

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Americans received yet another sobering reminder of China’s increasing economic strength and international clout this week. China sold a record amount of U.S. debt in December, raising speculation that Beijing is turning bearish on America.

Chinese investment in U.S. government securities dropped by $34.2 billion at the end of 2009 to $755.4 billion according to newly released figures from the Treasury Department. The decline is the greatest since Treasury data on Chinese holdings began in 2000.70-648

Beijing’s cutback on the greenback puts Japan in the lead as the largest holder of US Treasury securities. Japan and Britain increased their holdings of U.S. long term securities in December but global demand still fell sharply. Foreign holdings of US Treasury securities plummeted by a whopping $53 billion, surpassing the previous record drop of $44.5 billion in April of 2009.70-649

Beijing is leading the move away from U.S. debt instruments as President Barack Obama increases government borrowing to unprecedented levels to sustain economic recovery. In December, Obama increased the size of the marketable U.S. Treasury stock to a stunning record level $7.27 trillion.

If the trend continues, the United States will be forced to raise interest rates. That would put yet another strain on America’s ability to manage its mountain of debt.

Speculation about China’s intent has been running wild since the figures were released. Relations between Beijing and Washington are worsening almost daily. The deepening spat over Tibet, a controversy over U.S. arms sales to Taiwan, China's dispute with Google (GOOG) and trade and currency disagreements are still festering. In the latest dispute, President Barack Obama's administration rejected Beijing's demand to cancel his meeting this week with the Dalai Lama.70-652

Some analysts warn that China might be cutting purchases of U.S. Treasuries to flex its financial muscle. If so, Beijing’s economic leverage has its limits. America’s economic house is terribly fragile. Putting too much pressure on the U.S. economy could destroy America’s recovery or wreak even worse damage.

But Beijing is nothing if not pragmatic and there’s little chance that they would want to wreck the economy of their biggest customer, at least not now.

Most probably China is actively diversifying its holdings of foreign currency to defend its investments in dollar-denominated instruments against a decline in the greenback caused by excessive U.S. indebtedness.70-653

Beijing holds most of the cards in this game. It is a chilling turn of events to realize that America’s economic viability lies at the mercy of a foreign power. It is even more unsettling to consider that Washington is consumed in political gridlock and is either unaware of the danger or unable to restore the underpinnings of a sound, sustainable economy.

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Wed, 02/23/2011 - 02:12 | Link to Comment shawnlee
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Regardless, deflation will prevail...."

It does feel like we are rounding another bend on the spiral of deflation, what with the sovereigns and CRE ready to default, no?
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Sat, 03/26/2011 - 03:47 | Link to Comment shawnlee
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Tue, 04/12/2011 - 08:24 | Link to Comment virtual_office
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Bejing is still part of china..they're one country.  And to that issue about debt, no country don't borrow money from other country.

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