There is no free in liberty.


Sunday, April 24, 2011

A Chinese US Debt Dump?


For those of you not in the know there have not been enough buyers of US debt at current interest rates. In an effort to keep interest rates down the Federal Reserve has been buying US debt off the private market with "printed" dollars (in quotes as the dollars only exist as data) for more than the US government sells it for. This creates an appetite for US debt in the private markets thus keeping interest rates on US debt lower than they would otherwise be. In recent months the Federal Reserve has been clearing the private market at the rate of 70% of new debt issuance. In effect the Federal Reserve is buying 70% of new debt issuance.

The Fed hopes to eventually pass the baton of support to a healthier economy, but the economy has continued to lag growing ever more dependent on government support.

QE is a sign of US fiscal weakness.

Fewer and fewer see US debt as a good store of value. Europe, battling its own debt problems is a poor market for US debt, while Japan is caught between demographic issues, a 20 Keynesian born recession, and most recently the massive costs associated with earthquake, tsunami, and nuclear disasters has become a poor market for US debt as well.

Now in the wake of Obama's spend more budget proposal which makes self imposed American austerity an unlikely course China has joined S&P in viewing the US as a poorer investment. It seems China may not only cease buying US debt, but eventually dump 66% of their US debt.

Our congress' inability to reconcile the fiscal incoherence between its desire to spend and its ability to raise taxes has turned to debt to cover the difference and in so doing has laid its neck across the Chinese fiscal chopping block.

Schemes on dreams -- A poor choice.

Via Zero Hedge:
China appears to be getting ready to cut its USD reserves by roughly the amount of dollars that was recently printed by the Fed, or $2 trilion or so. And to think that this comes just as news that the Japanese pension fund will soon be dumping who knows what. So, once again, how about that "end of QE" again?

From Xinhua:

China's foreign exchange reserves increased by 197.4 billion U.S. dollars in the first three months of this year to 3.04 trillion U.S. dollars by the end of March.

Xia Bin, a member of the monetary policy committee of the central bank, said on Tuesday that 1 trillion U.S. dollars would be sufficient. He added that China should invest its foreign exchange reserves more strategically, using them to acquire resources and technology needed for the real economy.


No comments:

Post a Comment