SYDNEY (MarketWatch) — “The USA lived off credit for too long, inflated its financial sector massively and neglected its industrial base.” Such was the sobering assessment that German finance minister Wolfgang Schäuble gave the Wall Street Journal in November 2010.
Two years later, and after two more years of borrowing. U.S. government debt currently totals around U.S.$16 trillion.
The U.S. government holds around 40% of the debt through the Federal Reserve, Social Security Trust Fund and other government trust funds.
Individuals, corporations, banks, insurance companies, pension funds, mutual funds, state or local governments, hold 25%.
Foreign investors: China; Japan, and “other”, principally oil exporting nations, Asian central banks or sovereign wealth funds, hold the remaining 35%.
Historically, America has been able to run large budget and balance of payments deficits because it had no problems in finding investors in U.S. treasury securities.
Yet given the sheer quantum of U.S. debt and credit concerns, foreign investors may become increasingly less willing to finance America.
Japanese and European investors, for example, struggling to finance their own government obligations, may simply not have the funds to invest.
So far, the unquestioned credit quality of the U.S. and the unparalleled size and liquidity of its government bond market has ensured investor support.
Given its reserve currency and safe haven status, U.S. dollars DXY -.00% and U.S. government bonds are a cornerstone of investment portfolios of foreign lenders, especially central banks with large foreign exchange reserves.
During this period, emerging countries, such as China fueled American growth, both supplying cheap goods and providing cheap funding — recycling export proceeds into U.S. bonds — to finance the purchase of these goods.
It was a mutually convenient addiction — China financed customers creating demand for exports and America received the money to buy cheap Chinese goods.
Purchases of Treasury bonds with export proceeds also kept the local currency down relative to the U.S. dollar, aiding competitiveness.
Asked whether America hanged itself with an Asian rope, a Chinese official told a reporter: “No. It drowned itself in Asian liquidity.”
Debt be not proud
Given the lack of political will to deal with the problem of debt and public finances, the U.S. is now deploying its FMDs — weapons of financial mass destruction — to finance its requirements.
These include “financial extortion,” “monetization” and “devaluation.” In a form of financial extortion, existing investors such as China must continue to purchase U.S. dollars and government bonds to avoid a precipitous drop in the value of existing investments.
In 2010, Yu Yongding, a former adviser to China’s central bank, mused: “I do not think U.S. Treasurys are safe in the medium-and long-run…Only God knows how much value that China has stored in the U.S. government securities will be left in the future when China needs to run down its reserves.”
In 2011, a Chinese government spokesperson could only “hope the U.S. government will earnestly adopt responsible policies to strengthen international market confidence, and to respect and protect the interests of investors.”
Debt monetization — printing money — is another tactic. The Federal Reserve is already the in-house pawnbroker to the U.S. government, purchasing government bonds in return for supplying reserves to the banking system.
marketwatch.com
Two years later, and after two more years of borrowing. U.S. government debt currently totals around U.S.$16 trillion.
The U.S. government holds around 40% of the debt through the Federal Reserve, Social Security Trust Fund and other government trust funds.
Individuals, corporations, banks, insurance companies, pension funds, mutual funds, state or local governments, hold 25%.
Foreign investors: China; Japan, and “other”, principally oil exporting nations, Asian central banks or sovereign wealth funds, hold the remaining 35%.
Historically, America has been able to run large budget and balance of payments deficits because it had no problems in finding investors in U.S. treasury securities.
Yet given the sheer quantum of U.S. debt and credit concerns, foreign investors may become increasingly less willing to finance America.
Japanese and European investors, for example, struggling to finance their own government obligations, may simply not have the funds to invest.
So far, the unquestioned credit quality of the U.S. and the unparalleled size and liquidity of its government bond market has ensured investor support.
Given its reserve currency and safe haven status, U.S. dollars DXY -.00% and U.S. government bonds are a cornerstone of investment portfolios of foreign lenders, especially central banks with large foreign exchange reserves.
During this period, emerging countries, such as China fueled American growth, both supplying cheap goods and providing cheap funding — recycling export proceeds into U.S. bonds — to finance the purchase of these goods.
It was a mutually convenient addiction — China financed customers creating demand for exports and America received the money to buy cheap Chinese goods.
Purchases of Treasury bonds with export proceeds also kept the local currency down relative to the U.S. dollar, aiding competitiveness.
Asked whether America hanged itself with an Asian rope, a Chinese official told a reporter: “No. It drowned itself in Asian liquidity.”
Debt be not proud
Given the lack of political will to deal with the problem of debt and public finances, the U.S. is now deploying its FMDs — weapons of financial mass destruction — to finance its requirements.
These include “financial extortion,” “monetization” and “devaluation.” In a form of financial extortion, existing investors such as China must continue to purchase U.S. dollars and government bonds to avoid a precipitous drop in the value of existing investments.
In 2010, Yu Yongding, a former adviser to China’s central bank, mused: “I do not think U.S. Treasurys are safe in the medium-and long-run…Only God knows how much value that China has stored in the U.S. government securities will be left in the future when China needs to run down its reserves.”
In 2011, a Chinese government spokesperson could only “hope the U.S. government will earnestly adopt responsible policies to strengthen international market confidence, and to respect and protect the interests of investors.”
Debt monetization — printing money — is another tactic. The Federal Reserve is already the in-house pawnbroker to the U.S. government, purchasing government bonds in return for supplying reserves to the banking system.
marketwatch.com
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