Two pieces of disturbing news on the wires this week:
1: The Chinese are NOT buying U.S. debt anymore.
2: The Chinese ARE buying U.S. debt (except they are buying it through intermediaries).
And then there is always the fear that China might dump $700 billion or so of U.S. Treasuries and so yields will go through the roof.
If I had a dirty mind, (which of course I do not), I might have suggested China was gaming the system, pushing up the yield before the auctions, so they can buy cheap.
Actually according to Simon Johnson, a former IMF chief economist, that $700 billion is more like $1.2 trillion; but a hundred billion here and a hundred billion there, who’s counting? And who’s counting how much of the Non-Government debt, much of which is now toxic, is owned by foreigners?
Of course there is not much chance of anyone dumping that at the moment because no one is buying…apart from the Fed. Or perhaps some of the $1.25 trillion of “legacy assets” the Fed just bought, was a sop to the all powerful Chinese, no one knows if the Fed paid “face” for that stuff, or even who they bought it from.
If I had a really dirty mind, (which of course I do not), I might suspect that the Fed DID pay “face” and it did buy some of that “melamine-tainted milk” from America’s “Most Favoured Customers (for U.S. debt)” to encourage them to keep buying Treasuries.
But then no one will ever know, because unlike most U.S. Government or related “private” institutions, the Fed doesn’t have to give out those sorts of details.
“Who’s counting” is the operative word, the “estimates” from the Treasury (note the word “estimates”) don’t jive with the Bureau of Economic Analysis (BEA) numbers, but either way they are big numbers.
According to the Treasury, as of December 2009 China owned $894.8 billion of U.S. Treasuries out of $3.689 trillion that “foreign” governments own. It’s not completely clear how much of the remainder is owned by governments or individual foreigners, nor is it clear how much non-Treasury securities foreigners own, or their propensity to dump them.
The BEA has a table called “U.S. International Transactions Accounts Data” which goes from QI 1960 up to QIII 2009 which shows the debits and credits of international transactions in both “U.S. Treasury Securities” and “U.S. securities other than U.S. Treasury securities”.
Confusingly there are two lines for “U.S. Treasury Securities” (Line 58 and Line 65) and there is no explanation that I could find for why that is.
But if you add up those two lines going back to 1960 and allow something for the outstanding U.S. Securities in 1960 (pro-rata from the National Debt at that time), you get to a total of $3.724 trillion which is pretty much equal to the “estimate” (note the word “estimate”) put out by the Treasury ($3.689 trillion).
So I suppose it’s correct to add those two lines together, anyway this is a summary of what the BEA table shows:
Click to enlarge:
To avoid confusion I called the “U.S. securities other than U.S. Treasury securities” by the name “Toxic” and on the area chart the total amount outstanding of that stuff is in a nice putrid green colour (total in Q3 2009 added up to $4.64 trillion).
My reaction to that chart is as follows:
1: If China owns somewhere between $700 billion and $1.2 trillion of U.S. Treasuries, perhaps they own an equivalent amount of the toxic stuff? I remember hearing a number of about $500 billion floating around, that doesn’t sound unreasonable.
2: If I was China, and the U.S. was relying on me to put some of the $400 billion surplus that I made in 2009 into “safe” U.S. Treasuries (rather than for example using it to build ghost cities in Mongolia or to fund property speculation in Guangdong Province), I might just twist a few arms, and I might just get that arrogant jerk Geithner to kowtow too.
3: Notice how since about 1993 the purchases of “Toxic” and “Non Toxic” seem to go in waves (I smoothed those lines by showing the one-year moving average), and that when purchases of “toxic” was up, purchases of ”non-toxic” was down etc.
Could it be that when the shadow banks were manufacturing the melamine tainted stuff and shovelling it down the throats of the dumb foreigners, that helped the spendthrift U.S. Government out by (a) effectively (temporarily) cancelling out the current account deficit (b) providing liquidity in the U.S.A. that didn’t come from the Fed (c) and from that increasing tax revenues so the amount of debt that the government had to issue was reduced.
Sounds plausible, and it could explain why the Fed and all the other regulators were quite relaxed about what was going on – it made them look good.
Why increase public debt to raise the $3 trillion dollars (or more) that Joseph Stiglitz (and others) say the God-Inspired crusade to chase phantoms around Tora Bora and to search for WMD- will end up costing; when you can get the private sector to do it?
Of course the problem with holding the coat of the shadow banks whilst they sell container loads of the financial equivalent of melamine tainted milk to dumb foreigners, is that at some point “the customers” ask for their money back.
And if you are in no position to negotiate, stuck between a rock and a hard place with two options (a) you can inflate away your debts and the debts run up by the shadow banks, in which case no one will buy your Treasuries (and forget about any of those AAA rated Made In America With Pride Synthetic Collateralized Debt Obligations), or (b) you can kiss posterior.
Well you might just decide to kiss posterior.
Since the "Big Surprise" realization that the valuations of all the toxic junk that was on the books of US banks and Fannie Mae (FNM) and Freddie Mac (FRE) were indeed (as the International Valuation Standards Committee had pointed out in July 2003 “hopelessly flawed and bound to be misleading”) just plain wrong. The U.S. has “paid back” $187.53 billion worth of toxic stuff to foreigners (according to BEA).
Perhaps that was sold in the “market-place”?
But err…there was only one market-place, the Fed.
Of course no one knows how much the Fed was paying, or who they bought that $1.25 trillion of toxic junk from, but if I was China, and I was selling, I would have asked “face”, and the threat would have been “well sweetheart, if you want any more of my money, that’s the price you are going to have to pay” - to "save face" as they say.
Perhaps the reality about the yield on the 10-Year and 30-Year is that it’s going to be “Made in China” these days, like just about everything else in America.
Disclosure: No positions