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Buying Back America

International Dancing with US Securities
It’s enough to make a stock broker dizzy. As China, the awkward and abrasive US dance partner in the ballroom of foreign debt investment cautiously backs away, Japan seems more than willing to step up and continue the waltz. In 2008, it was China who cut in on Japan to become the world leader in buying American dollars. Now that trend seems to be reversing, and America knows that the financial interplay must continue, for both the sake of the United States economy and that of the global community.

It appears that the Japanese and the US Feds are poised to become the team that passes China as America’s largest creditors. Both the Bank of Japan and the American policy makers have been actively working in this direction to stimulate growth and bolster a shaky world economy. The Feds plan to buy $32 billion in Treasuries by November of this year.

US Treasuries are actually government-sanctioned debt obligations that are created to fund government projects. When they are purchased through auction in primary markets or by a stock broker in secondary markets, they have the United States guarantee of “full faith and credit” backing. Their set interest rate continues to accrue until maturity. These are available as notes, bills, and bonds and can be purchased through online trading.

In the 1990s China began heavily investing in US Treasuries with money it received in exchange for goods. By buying US dollars, China was able to support her exporters and keep the value of the yuan down. To set some sort of example, in 2008, American consumers bought $340 billion worth of Chinese products. Most of that cash emptied into China was immediately invested in US Treasuries. In 2009, 82% of China’s $2 trillion collected in foreign reserves was actually in American dollars. At present China stands to collect about $50 million a year in interest alone on these Treasury notes.

However, China has been withdrawing slightly in her eagerness to purchase more American debt. Since 2009, short term bills that will mature in less than a year have been more popular than the long term ones. Over the last year there has been an 11% decline in overall holdings of American Treasuries, falling from $938.1 billion to $843.7 billion, a significant drop in 9 months of about $94 billion.

It would appear that China is becoming increasingly confident of her ability to do business with the expanded international market. Perhaps her increasing debt load and shaken economy has made the US less appealing than she was a few years ago. She may be seen as a “sunset power” by a country eager to promote its own model of “authoritarian state capitalism.” The powerful and pushy Chinese military may also be driving her economic policy into more diversified markets.

Interestingly, as US consumption of Chinese products has recently dropped slightly (2% -3%), Chinese exports to the US have fallen 20% - 30%. High unemployment and an economy that has gradually slowed since 2008, cause one to wonder about China’s stability as well as our own.

Japan, on the other hand, has been more than willing to step into the emptying shoes left by China’s cuts in July. Recently adding $55.3 billion to create a new total of $821 billion in American Treasuries is a significant dance step. The Japanese like to buy US bonds because the process of buying with dollars allows them to sell more of their yen which is now riding at a 15 year high of 81.39 cents to the American dollar. Probably most of the dollars that the Bank of Japan purchased were invested in Treasuries.

When all is said and done, switching dance partners from China to Japan has accomplished little more than to allow this somewhat precarious dance to continue. There appears to be no overall decline in interest in purchasing US debt because investors enjoy the safety of its liquidity. The stock broker will be busy tomorrow, online trading will continue, and so will the dance.

Disclosure: No Positions