Saturday, August 21, 2010

Foreign Buyers of U.S. Government Debt Are Changing

By Bud Conrad

The U.S. continues its delicate balance of buying foreign goods that supply the money to foreigners to buy our government debt. They now own $4 trillion of Treasuries, having purchased a half-trillion in the last year. That supplies our federal government to fund our $1.5 trillion budget deficit. Without these big purchases by foreigners, our interest rates would have to rise to attract buyers and the dollar would be weaker.

The chart below shows foreigners’ holdings of our government debt (Treasuries) over the last year. While the upward slope seems modest in this big-picture view, that is because they started the year with $3.5 trillion Treasuries. The 16% growth is large.

The breakout between Foreign Private and Foreign Official shows that the private sector is the source of growth. Remember that across this time frame, many had been losing confidence in the eurozone after Greece became close to insolvent. That caused a flight toward the dollar, and the safest dollar investment is Treasuries.

A further breakdown to the largest holders reveals one important shift: China actually sold off holdings. This is a surprise, as their trade surplus with us continued in positive territory. Hong Kong bought $45 B in this period, so the total sell-off would be less if this was added to mainland China’s $72 B sell-off.

The other surprise is the size of the purchases from the U.K. Some of this could be from Britain-based people and enterprises fearing problems with their pound, but more likely it comes from other countries that use the money center of London to make their investments, so we see it as Britain-based. The most likely would be Middle Eastern oil interests, as oil prices are higher and the investments are shielded from the direct linkage back to the source. It could also be other Europeans using London to transact on their behalf, fleeing the euro for the perceived safety of the dollar.

Japan has returned to buying U.S. Treasuries, perhaps because their own interest rates are so low.

While the overall picture shows foreigners continuing to invest in Treasuries, there is some weakness in the components here. The one to watch is China as they hold $843 B, and if they sold in quantity, we could face serious problems in the U.S. with funding our budget deficits.

The other question is what is behind the big purchases from the U.K. and whether they are potentially fickle if, say, U.S. policy in the Middle East were to bring caution to investors in dollars. There isn’t enough data here to predict the future, but the sheer size of the foreign holding adds danger to those that think we can run deficits forever without consequences.

So I watch this data closely as a way to read foreigners’ confidence. The relatively modest Chinese sell-off should be watched closely, because if it grew, other countries could lose confidence too.
The above initially appeared in a Casey Dispatch, available here.


  1. Only going to post arguments that float your way Robert? Guaranteed method to encourage group-think and ensure you're biased viewponts go unchallenged. I'm going to log the deletions and content that was deleted. You may be surprised where it ends up.

    Free speech be damned on EPJ.

  2. Now, these people are aware that our banks are sitting on reserves that could potentially double the money supply, right? And that interest rates that are artificially kept low are what caused the bubble and the recession, right? And that our Fed is still holding interest rates artificially low, right? And that our federal government is deficit spending 1) at record rates in both real money and relative to the size of the economy, and 2) is doing so to no beneficial effect, right?

    Seriously, the Euro must be in some real trouble if the dollar is "safe".