Kevin Walmsley

Savings, Debt and the Global Economy

The Chinese "demand" for treasuries was merely a recycling of the cash sent over to buy manufactured goods. It's a function of the capital account, by which any trade deficit is financed with a capital surplus, and vice versa. Americans for 30 years have been selling capital goods (bonds, stocks, real estate) in exchange for consumption.

Now, we've started to consume less. For the first time in decades, we're starting to spend less, and save more. Chinese demand for bonds isn't seeing a reduction in enthusiasm--it was never there in the first place. There's diminished demand, because the flow of American dollars to Beijing has stopped.

Don't forget, too, the promised Chinese stimulus of $600 billion. Where do you suppose the money is going to come from? Most logical choice is to sell off their enormous supply of American treasuries, at the exact time Obama is going to have a big fire sale on the same instruments. It'll be interesting to see bond yields soar, despite deflation.