When data released last year showed China losing its appetite for U.S. bonds, it didn’t cause much concern. Sure, some bloggers took notice, such as the always alert Tyler Durden(s) in this post. But most pundits saw other countries picking up the slack and decided to “move along, nothing to see here.”
As of later this month, we’ll receive the final picture on China’s U.S. bond sales over late 2011 and early 2012, and the reaction isn’t likely to be much different than it was last year. But I’ll argue that there’s actually quite a lot to see. Namely, there’s a brand new reason to be concerned about America’s access to foreign capital.
Comparing annual and monthly TIC data
I’ll first share data from the Treasury International Capital (TIC) System’s annual survey of foreigners’ U.S. bond holdings. Those familiar with the TIC data know that these annual results are notoriously stale. Preliminary data was released on February 28th, with the final report due April 30th for a survey describing foreign bond holdings as of June 2012.
In other words, there’s a 10 month lag from survey date to report date.
But the first thing we learned from the preliminary release is that the annual survey didn’t add much information to the approximations published by the Treasury Department on a monthly basis. Thanks to new methods, which were introduced to fix large errors that used to occur in the monthly approximations, revisions were minor this time around.
The February 28th release merely confirms that China dumped U.S. bonds between the annual survey dates of June 2011 and June 2012, while other countries offset China’s sales by increasing their holdings.
Here’s the comparison of total foreign holdings of U.S. government bonds to China’s holdings:
Now for the bad news
As I mentioned above, most pundits have sounded the all clear based on the continued increase in total foreign holdings. To see the bad news, though, we need to dig deeper. We need to ask who picked up the bonds that China’s no longer buying. And then more importantly, whether those increased purchases are sustainable.
To answer the first question, the chart below shows the top ten buyers of U.S. government bonds in the year ended June 2012, compared to the same countries’ average net purchases in the previous five years.
Japan was the star of the bunch, adding $217 billion to its U.S. government bonds. But it wasn’t the only country to significantly increase its positions. With the sole exception of Brazil, each country in the chart set a new record for the change in U.S. bond holdings in a single year.
Now, moving onto the question of sustainability, we need to collect more information before developing an answer. We need a proxy for each country’s ability to absorb U.S. bonds on a consistent basis. And an excellent choice is the current account balance, which tells us how much foreign currency a country is generating naturally through global trade. It was China’s massive current account surplus, after all, that created the piles of dollars that it was able to recycle into U.S. Treasuries and other global assets in recent decades.
Take the five years from June 2006 to June 2011, for example. On average, China added $183 billion per year to its U.S. government bond holdings over that period. And over roughly the same period (I used calendar years for simplicity), its current account surplus averaged $293 billion per year.
China was spending about 60% of its current account surplus on U.S. government bonds, which seems a manageable amount.
But how about the ten countries in the second chart above? Collecting them into three groups (Japan alone in the first group, then the next four largest bond buyers, and then the five after that), I’ve compared their U.S. government bond purchases to the IMF’s estimates for current account balances in 2012:
Defining unsustainable
These results suggest a whole new challenge in the quest for buyers of U.S. bonds. The old challenge was to sustain the status quo of large current account surpluses and correspondingly large U.S. bond purchases in China. We knew there were limits to the sustainability of these surpluses, but we also knew they can persist for a long time before finally correcting. And after corrections occur, such as in the global trade collapse of 2008/09, imbalances can return.
But today, we’re dealing with a different notion of unsustainable. As long as China was willing to buy huge amounts of U.S. bonds in recent times, it was more than capable of doing so. But you can’t draw the same conclusions for Japan, Switzerland, Belgium and so on. As shown in the chart, investors in these countries spent more than twice their aggregate current account surpluses to buy U.S. bonds in 2011/12. This is much less sustainable than relying on China.
It simply can’t continue for very long.
The results shown above also explain the observation that all but one of the ten countries set new records for net U.S. bond purchases in the latest measurement year. They’ve never bought as many U.S. bonds before 2011/12 because they could only reach these amounts by reallocating assets from other investments, which isn’t something that can be done continually. Again, it’s unsustainable.
In a nutshell, America needs foreigners to be both willing and able to buy its bonds.
China is able but much less willing than it used to be. (Treasury data that isn’t shown here suggests its interest in U.S. securities recovered somewhat in late 2012, but remains far short of the levels of two years ago.)
Other countries are willing but not nearly as able as China, notwithstanding the sharp increase in purchases in the recent period.
And overall, the message in the preliminary TIC data is more worrisome than it may appear on the surface. Should the final report on April 30th confirm the message, consider it a warning of a potentially disastrous future decline in foreign purchases of U.S. debt.
(For another perspective on the limits to government borrowing, see “Answering the Most Important Question in Today’s Economy.”)
Good thing the fed is buying all those bonds. Not to mention the US pension funds... Just like Spain has been doing... Spain pension funds are being crushed for buying crappy bonds... Same thing will happen with US pension funds...
Don't worry, financial ``experts`` keep calling those bonds ``the safest thing there is``... lulz.
The Obamanation thinks it's OK to piss on the landlord
Must be a cultural thing.
knukles does your boy look worried?
http://www.google.com/imgres?imgurl=http://cdn.breitbart.com/mediaserver/Breitbart/Big-Government/2012/Obamas/jay-z-obama-ap.jpg&imgrefurl=http://www.breitbart.com/Big-Hollywood/2012/11/05/jay-z-uses-mitt-bitch&h=356&w=475&sz=45&tbnid=j0cAe-G4IdVOUM:&tbnh=90&tbnw=120&zoom=1&usg=__MMl_ANgfN2HWuMLfz6PT2CBK4iA=&docid=If0aryi3AgQQ4M&hl=en&sa=X&ei=7SxnUYqgDuHC4AOqmoCgBw&ved=0CEIQ9QEwBQ&dur=1264
Since Ben will print to make up the difference, why does it matter if China stops buying?
I'm curious as to what China's decrease in US Treasury holdings would look like if China's USTs were simply maturing. Can we really say from the data presented that China is "dumping" (i.e., selling) USTs?
The Fed has up to date data that shows foreign holdings in house at the Fed (ZH has reported on this). Curious to see how those data compare to these charts.
And the ones that they roll over, are the same maturity or a shorter date?
China won't stop buying our treasuries bc then we stop buying their trinkets.
But srsly, Fed is buying all bonds and will continue to do so. Rates go up to 4% and gig is up. Debt service alone would be more than our current budget gap.
If you're asking me who you can loan $100 to that you will absolutely get back, then treasuries are the safest thing on the planet. Period. The smarter question isn't if you get the dollars back, but what those dollars are worth.
Great article but I think it came up short only in missing the next step. Its not China stops buying treasuries --> game over. Its China stops buying treasuries --> fed picks up the slack --> game over.
Let's at least make some money.. Ahem...fiat... in between
China's foreign exchange reserves keep INCREASING and their UST holding depending on the time period are either nominally FLAT or DECREASING, which absolutely represents a DIVERSIFICATION AWAY FROM THE USD.
I don't see that the US has stopped buying their crap in retaliation.
perhaps because a great part of this crap is designed in the US and built in China - increasing the coffers of the megacorporations who are listed in NY but produce in China?
the funny part of the whole deal is that for many years the Chinese would have preferred to buy stocks and land instead of bonds - but as for the Japanese before them too many "national assets" in the hands of foreigners creates political backlashes and blocks
There isn't enough equity to go around... (even without the contingent demand for equity via derivatives) and I would assume CNOOC/Unocal went down in China about the same way the DPW fiasco did in to middle east which means there are more wealthy and powerful foreigners with a grudge not looking to prop up USD hegemony any longer than it suits THEIR interests to prop it up. From all the talk about how well the Bush Clan and House of Saud get along I don't think most people realize how deeply the DPW move screwed the strategic partnership.
dupe post. sorry
Your Xactly Rigt, TIC means Nothing Anymore!
I know, also look at the top ten places and how easy it would be to set up a Fed operated shell company that is licensed in that country to buy US bonds and say it's in that country. So really we could be buying those bonds in accounts over in those countries and just keeping them offshore. When this whole mess implodes it will be nasty.
How can China buy more of our sovereign debt when the Fed and US banks are taking it all?
Japanese people seem2be very loyal... maybe. Especially after you nuked them?
It was wearing off though, hence the need for Fukushima.
Wonder where they'll put that new Trillion they're going to print. Puppets!
Why would ANY foreigner subsidize the US Military Energy Industrial Imperialism? Didn't they get the message yet?
Because if they don't, the US attacks them in every way imaginable.
You're asking why the imperial periphery subsidizes the imperial center?
Caesar says: you need to learn more about how empires work. Veni vidi I made you my bitch.
Why so glum chum, US IRAs and 401Ks can pick up the slack. Hell, the good ol' US Gov won't even ask, they'll just 'help' everyone 'invest'.
I don't get the point of this article. Who the f$%# cares if any foreign country is buying UST? If they all stopped buying UST tomorrow, the FED would pick up 100% of the slack.
Because the FED could lose Reserve Currency Status. Then printing would cause hipper inflation like Zimbabwe.
Could?
All it good time, my nasty prolific FRN, all in good time.
Foreign countries buying USTs are NOT the reason the USD has Reserve Currency Status. Foreign countries hold USDs because the USD IS DEFINED a RESERVE CURRENCY, (theoretically) "as good as gold" as least as far as currency reserves are concerned.
Yeah. And a belt is designated as a thing that holds up your pants... until you hang yourself with it.
Then it's called a noose.
There seems to be a lot of ignorance concerning what the definition of "reserve currency" is. The dollar, sterling and gold were defined to be the reserves behind the various world currencies in the 1920s. This was reaffirmed, in the case of the dollar and gold by Bretton Woods. This is not my opinion. It is historical fact.
Does the phrase "true by definition" mean anything to you?
emlab.berkeley.edu/~eichengr/rise_fall_dollar_temin.pdf
you got it exactly... the wrong way round: reserve currency status is "bestowed" upon by foreigners - by buying up sov debt
+1 for hipper inflation
Hey guy, it's just 30%, all the cool kids are doing it. 3% is like soooo last year.
Don't be a...http://www.youtube.com/watch?v=mi6tQthPDWc
Look to Iran's survival for the answer. If the 'Petro Dollar' is subverted, then no need to funnel money back to UST's. China plans to replace it, sooner or later.
Your IRA (Individual Registered Account) is a "lead" for the solicitor who doesn't take no for an answer.
Long TMV bring it on muhfuckuhz
Paging Whiteknight
U still here buddy?
U still short t-bills? Small setback but still doin it
Why would any Foreign Country buy out Debt when all we do is to try to deminish the value of our own Dollar? Any Debt they buy is being depreciated at a substantial rate with Bernanke's printing.
Plus, China is trying to make its own currency more valuable. By buying Gold and trading in its own Currency with other partners.
The Fed has ignored their mandate to keep the Dollar Strong.
Examine the numbers.
There is no market as large as US Ts. Anyone who wants to park somewhere liquid, parks there. This is not debateable. It's just reality.
The Fed is buying about 1/2 the US Ts that are issued by Treasury, presently. 45B/month, which is just about 1/2 of this year's deficit. There will ALWAYS, repeat, ALWAYS be a demand for 500B/yr of US Ts by bond buyers, be they foreign or not.
The gold guys hate this and talk about how unsafe US Ts are, but that really is not the point. There is nowhere else to go that has that volume and can absorb big numbers. Bonds will be where fear goes because there is nowhere else big enough to go.
Just how safe are US Ts if 20% of the population are illegals and the other 50% are on the Government dole. There is no one that will pay taxes to back stop the Treasurys.
The US needs tax payers to guarantee the safety of the Bonds. Without Taxpayers and everyone on the Dole there is no one to support or repay the Treasurys. Or ever repay the debt much less the interes.
US Treasuries are not backed by "the taxpayers". They are backed by the right, title and ownership of The American People, i.e. the U.S. government's title to The American People has been collateralized.
You and I and every other American are mortgaged. All our stuff is mortgaged as well.
Indeed.
Government = taxfarm
Everyone, moo with me...mooooooo
You don't seem to have gotten the point.
It's not a safety issue. It's a volume issue. If there's nowhere else to go, then that's that. There's nowhere else to go. It will be perceived as safe because there's no choice.
the issue becomes the amount of dollars , like a flood in your basement.
the dollar value starts dropping faster and faster - that becomes the inflection point.
you get rid of it because it is losing value. that is the course ben has us on. quite simple.
85billion/month question is; when does the world say i want no more of your dollars. well, that is rearing its ugly head via misallocations. first is the stock market. second will be the math behind the us governments budget and its ability to continue paying interest and financing the deficet, all while less and less are working and paying less taxes. just math and stockman and many others are warnig to deaf ears.
then shalom must print more and more or cause major disruptions to stock prices and/or lower bond values while he continues to flood the markets with dollars. the dollar loses value at an accelerating rate before getting discarded for better and safer places and sounder economies such as...
we are already beyond the point of no return, mainly because our sustaining industries are dislocated to lower wage countries and will continue as their is no desire by corporations to lower profit margins to employ you. and these corps are international in nature. could tax foriegn profits much higher to reverse trend but then you are talking about democracy instead of facism-not happening.
only option is to continue taxing higher and siezure of personel property to keep this going till it doesn't go.
my guess is 60-70 percent taxation/theft before a revolt simmers, but then it is beyond any of the wildest wish/think/hope/change for resotation.
Put another way- Basically every government is debasing their currency- i.e. printing digital banknotes and issuing bonds to offset the banknotes (Switzerland is quirky but I'll ignore that for now).
It makes no sense for a central bank to hold its own government's bonds (because those bonds are intrinsically worthless when you are the printer of the banknotes, read that again & think about it- hint: for all intensive purposes the money supply is digital and the domestic "banknote" side of the transaction ledger entry remains on the balance sheet of the member/owner banks of the central bank).
So the central banks trade the worthless bonds of their own Governments for those of another government (which are somehow supposed to be less worthless, or perhaps staffed by bigger fools) and thus gain relatively valuable Foreign Exchange Reserves... as opposed to monetizing their own debt...
IT"S PURE INSANITY AND ACCOUNTING MANIPULATION.
They will go to gold, and price will solve everything.
Yes indeed, Treasuries for Gold: the great rotation Bitchez
The other countries can crush both the US federal Reserve and the ECB if they work it right. Pick up the peices and have the US and Europe connected to a ball and chains.
Perhaps we now have the real reason why "Bennie and the Fed" went to $85 Billion/month?
China and the rest of the world should all dump their US dollars and and all announce they did so afterwards and watch the panic.
Then announce they should announce their no longer accepting any more US dollars. They have a new backed currency.
Immediately the BRICs raise their prices by several hundred percent. Watch US inflation just soar several hundred percent while suppliers are crushed. Get Vietnam and the middle Eastern countries to join in.
The Fed can't raise interest rates, otherwise it consumes all of the tax revenue. The fed can print all it wants into a worsening inflation picture.
It's a much better weapon than missiles or bullets.
We'd be looking at a new dark age for sure if that happens.
"Pearl Harbor didn't work so we got you with tape decks"
They are in the process, now. They're signing trade deals that settle in Yuan. The 'big enchilada' is settling Oil trades outside the dollar. This will seal the fate of the Vampires in New York.
They want to eat, don't they? How are the Chinese and the Arabs going to buy US wheat and corn without US dollars? They can do some trade in their own currencies, but not all of it. They still need US dollars.
China knows the $US is toast but doesn't want it to collapse while they're still holding billions. BUT China has cut back drastically on new purchases of T-Bills and is converting $US holdings into TANGIBLE assets like Australian and South American mining companies and African farmland. They've been signing long term contracts for oil with former Soviet republics and others - paying in $US. Meanwhile China continues to stockpile gold and .negotiate trading agreements with others (Russia, India and others) to pay directly - without using $US. China MAKES things that others want. If the US isn't buying others are - and China's own population is now becoming wealthy enough to consume what they produce. China is the world's largest CREDITOR NATION - the US is teh largeest DEBTOR nation. And as long as the Arabs have oil, they will be able to buy food.
ON the other hand, the US is in deep trouble if oil goes up in price drastically (supply/demand or simply because the $US loses buying power). You can't produce food without diesel, fertilizer and pesticides (and WATER which is in ever shorter supply as we pump out aquifers in the midwest and west).
The US has been despertate to continue the petrodollar (one of the reasons for taking out Iraq and Libya - and the reason for saber rattling over Iran). Any country that talks of selling oil in anything but dollars puts itself at risk of military retaliation...... but the US Empire is broke and overextended. Expect one last 'diversion' - war with Iran or maybe North Korea - before the final implosion. It may be long, drawn out and nasty but it will occur. You can't inflate your way out of the mess we're in and you can't possiblly grow fast enough to pay off what's owed. You'll have severe cuts and rioting in the streets as prices in the US go up and benefits are cut.
History shows that ALL fiat currencies - all currencies - eventually debase and collapse, that the 'world standard' (no matter what currency it may be) has a limited life. The $US had a longer run than most but it's in deep, deep trouble. We've been living on credit for 40 years and the bills are coming due.
I agree with what you're saying. However, lets start with the knowledge that all fiat currencies eventually debase and collapse, that's a given. Then add the fact that there will never be a world standard because humanity is in constant motion and disagreement. Then add the fact that local revolutions in collapsing nations will insure shifts in power which will result in the use of nuclear weapons against their "perceived" enemies. At that point, will anything you're saying really matter? That's why you shouldn't worry about whether America can produce enough fuel, food and water to sustain itself. It has produced surplus in the past, there's no reason to think it won't in the future, especially when faced with "true" war. Things can shift very quickly.
The US of A doesn't need no stinking foreigners buying US debt. We've got traitors in the Federal Reserve.
The Fed is doing what most 'merikans have done for years - paying Visa with Mastercard and Mastercard with Discover and Discover with Visa....... not good enough credit rating for Amex
"Net US.gov bond purchases" FED: "Who cares who owns what.. ?!!"
"US treasuries create 'em (bonds). WE create "$$$ Bit Dullahs" for 'em.
We buy 'em, we hold 'em , If we have to sell 'em (a.k.a. operation "EXIT"), we buy 'em again..
We have 2 hands do we? One sells other buys.."
Something f*cking wrong with that?
Shut up, fools, and sell GOLD as Goldman told you.
Thank you for your cooperation :)))
wong thwed.
Who would buy bonds of a bankrupt country where government spending per household exceeds income?
Government Spending Per Household Exceeds Median Household Income Terence JeffreyAs reported in my new book, “Completely Predictable,” the combined spending of federal, state and local governments per American household actually exceeded the median household income for 2010, which is the latest year for which all relevant government data are available.
In fiscal 2010, according to numbers published by the Census Bureau and the Office of Management and Budget (OMB), net spending by all levels of government in the United States was $5,942,988,401,000. That equaled $50,074 for each one of the 118,682,000 households in the country.
In that same year, according to the Census Bureau, the median household income was $49,445.
http://www.sumnerbooks.com/books/view/completely-predictable
Ive joined reality.......I just bought my first shares of the Dow ETF with my new home equity line that I opened up....feels great....haven't done this since 1999.......oh.....wait.......shit.......
what could go wrong?
Didn't the Fed launder these purchases wih a bunch of currency swaps into the ECB / Euro mechanism?
benny shalom and the inkjets can just buy the whole lot of bitbonds without repercussions forever
The US FedRes and Treasury are like HIV positive dudes running around fucking and infecting everything that walks except with "HIV" money.
The US is a plague in more ways than one. hujel
With ZIRP, US pensions are toast anyway, so go ahead and buy the bonds.
the much bigger problem is not the who the buyers of usts are. the only problem is who needs to buy usts. usts are the liquidity of world trade underpinned by commodities. if the brics have agreements to trade in their own currency and they can source their energy and commodity needs in local currency(local to brics) then what need of dollars do they have? none. if they have no need of dollars and they can convince other countries(australia, indonesia, japan, singapore, iran, etc) then the dollar loses all the priveleges and abuses of a reserve currency. once the dollar loses reserve currency status the society devolves into an apocalyptic nightmare. that is why the usa is positioning for a huge capacity destruction event with nato in tow, the ultimate white supremacy movement.
The BRICS currency swap line are already showing in the UST auctions as less bid to covere,
less indirect purchases etc.,considering how they only just started their dollar workarounds
its already impressive.I dn't believe the Fed Res/treasury figures anyhow , I'm sure China holds no
UST's now except in name only.
ABE is just another US banker pond piece to support the ponzi that is the US Treasury. Fits neatly together
The USA is running a trade deficit with the world. As long as that reamins true, foreigners must buy our bonds - by definition. If China doesn't, they have to swap their excess dollars to someone else who will. It looks like China swaps its excess dollars for Euros and the denizens of Euroland buy the bonds. Japan also runs a trade surplus with the US, so they must either buy our bonds or swap those dollars for other currencies. Besides, the Yen is a carry-trade currency, and current efforts to depreciate the Yen should increase their trade surplus and their purchases of US bonds.
There is only one way for foreigners to stop buying our bonds. If the dollar depreciates enough to end the US trade deficit, foreigners will no longer have excess dollars.
Bernanke: Bitcoin-backed Bonds, anyone?
Sure, you can redeem your shitty USTs for fiat dollars, but what will the dollars buy when you do?
Purchasing power is what you really need...Gold and Silver bitchez. It's the only way.
Wiley is obviously missing the point of QE, it is not Japanese's excess current account that enables them to purchase treasuries, but rather it is their monetary printing that allows this, and yes it can go on indefinitely and for as long as the current fiat system is in place. This is why in nominal terms equities will continue to rise, because equities are not a realistic measure of growth, but rather a safe haven for QE. I hate to break it to anyone here that follows ZH as most of us are fundamentally sound and sensible people, the fact of the matter is, those in control have the capital controls and that is all that matters. Nature will eventually have its way with us, however it may just take a lot longer than sane people expect, as for now, nothing is going to stop equities from continuing higher in nominal terms, not a euro banking crisis, not a nkorea false flag, nothing. SP500 is undervalued in terms of the amount of QE that has gone on over the last 4 years and I expect it to go straight up to 2000 with small 3 percent buy corrections...
AND this is predicated on the TIC data being accurate. I think Treasury is lying about the data and has been for 10 years
As per a ZH posted a day or two ago, China export data fudged: "China Customs Official Apologizes for Incorrect Data"
http://www.bloomberg.com/news/2013-04-11/china-customs-official-apologizes-for-incorrect-investment-data.html
Why worry? The FED can print can't they?
The Accumulation of debt due to the war did to Britain a loss of reserve curreny status. the US is doing that too without a world war though (debt level similar to a situation where we would have war.) So US will lose its currency position, it is inevitable.