Posted on 04/26/2011 5:30:34 AM PDT by SeekAndFind
There's been some discussion over the last few days of what is going to happen if China starts reducing its position in US Treasuries. Seeking Alpha has a good summation of the problem:
In response, during a recent summit, the leaders of Brazil, Russia, India, China and South Africa (the BRICS) announced that they want to trade between themselves in their own currencies. This comes amid a growing chorus in China pushing for a limit of dollar reserves to $1.3 trillion. At present, China, whose economy the IMF says will outpace that of the US by 2016, has $3.04 trillion in dollar reserves. What's going to happen to the dollar when China sells off $1.74 trillion? And who, besides the Federal Reserve, is going to buy our bonds? If anything, I think this understates the problem. The real issue starts, not when China starts selling our bonds, but when China stops buying our bonds. As soon as that happens, we're in big trouble.
Right now, when Treasury goes to sell new bonds, it enters a fairly robust market, with not just the Fed but a bunch of fairly price-inelastic Asian central banks who are willing to take on our bonds at whatever the market offers. If China exits the market, we will either need to borrow less, or attract new lenders by offering higher interest rates. Even a noticeable decrease in volume would force us to pay more for our deficits. We saw this on a personal level in 2009 when credit card companies reacted to the crisis by reducing credit limits, often to the outstanding balance. This was a big problem for households who were faced with sudden cutbacks, or higher interest rates, or even both.
(Excerpt) Read more at theatlantic.com ...
Clearly, the answer is that we have to start living within our means.
Better than Greece, worse off than Italy, Portugal, Spain, Ireland. I have a solution. Don’t extend the debt limit.
I'm more worried about the Fed.
And who, besides the Federal Reserve, is going to buy our bonds?
The Federal Reserve is propping up the market for US Treasury Bonds right now. They have been the biggest buyer for the past several months. This could end after June.
If the Fed stops buying, that's a bigger problem than China stopping.
If the Fed continues buying, that's also a bigger problem. We are already seeing inflation. A big part of the oil price spike has been a decline in the US Dollar. Other commodities have also been hit pretty hard. It's just a matter of time before those higher commodity prices result in more expensive goods on the shelves at Walmart and the grocery store. We're already seeing it at the grocery stores, even though the official government "inflation" figures don't show much. And we're seeing it at the gas pumps, too.
Part of the issue with BRICS wanting to move away from the US Dollar is their perception (correct perception, I might add) that our fiscal policies and monetary policies are trashing the value of our dollars.
The S&P rating outlook downgrade was a wakeup call.
But Obama and the Dems want to keep spending and try to tax our way to prosperity. That won't work.
The Republicans want to scale back a little, and keep borrowing less for at least the next 25 years. That's the Ryan plan. It's also why a Balanced Budget amendment is not going to happen in the House. They have already committed to smaller (but significant) deficits for the next 10+ years.
Meanwhile, the Fed just keeps digitizing money to buy up the debt that nobody else wants. This will bring massive inflation if they keep it up. And it will cause economic turmoil when they stop. It's a no win situation.
This is not going to end well.
I recently predicted that within my lifetime (I'm 48 now), I fully expect to have a $1 million Federal Reserve Note of my very own. Unfortunately, I doubt that it will buy a gallon of gasoline when I finally get one.
There was a wonderful chart that I saw once that showed all the cross relations of debt buying between countries. I’ve always wondered what would happen if the cross buys between countries were just balanced and wiped off the books - couldn’t do this with the private of course, but made me wonder how much of an issue it really was ... and how much shenanigans there were too.
bump for later read.
The Fed - ... never mind
Yes, indeed. One of the side effects of decreased dollar reserves abroad will be the dollar dropping even further. Though the Fed has been inflating since the early seventies (with a short break by Volcker), the dollar's exchange value has been propped up by foreign demand.
It is that which has been the primary cause of our long-term trade deficit. Wages and salaries rose in the US to keep up with inflation, and an artificially-high dollar abroad made foreign-made goods very cheap for American consumers.
Now, a dropping dollar will, no doubt, cause a lot of pain for American consumers, but -- for those of you who worry about such things -- it will make imports more expensive easing the trade deficit and, perhaps, eventually making domestic production competitive once again.
Of course, a balanced federal budget would be nice.
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