1) China has bought — according to the US TIC data — about $150 billion of Treasuries over the last three months of data. Annualized that is $600 billion, a huge sum. That data only runs through November. However, ongoing growth in the Fed’s custodial accounts implies that this basic pattern continued in December (data/ graphs can be found here)
2) The surge in China’s Treasury purchases has come even as China’s reserve growth has slowed. It consequently reflects a reallocation of China’s portfolio towards the safety of the Treasury market more than a surge in Chinese demand for dollars — and it may also reflect a decision by China’s reserve managers to shift funds out of the hands of private fund managers after Lehman (a decision that has had the effect of increasing reported Chinese purchases of US assets).
3) Once the shift in China’s portfolio toward safety ends, the pace of China’s purchases of Treasuries is likely to fall. It is hard to sustain a $600b annual increase in your holdings of Treasuries if your reserves aren’t growing. Hot money outflows will bring China’s savings into the global market, but in a less direct and harder to track way.
4) The Treasury has increased its issuance even faster than China has increased its purchases. The US is consequently selling more Treasuries to everyone, not just to China. The increase in China’s holdings of Treasuries consequently accounts for a significantly smaller share of the net increase in the supply of marketable Treasuries than in the past (Data here)
He also warns about the 2009 deficit:
One thing though is quite clear but strikes many as counter-intuitive: the large US fiscal deficit in 2009 will need to be financed primarily from domestic sources not from China. Let me put it this way. China currently has — in my judgment — about $900 billion of Treasuries. That is a truly staggering sum. But China also didn’t buy them all in a year. The US will need to sell more than $900 billion of Treasuries to cover its 2009 budget deficit. And China isn’t going to double its Treasury holdings in 2009 …Thus, a number of conclusions can be made from this data. First, given the HUGE deficit financing that the US will conduct in 2009, it is truly bizarre that the Obama Administration wants to pressure China into providing less support for the dollar, i.e., They want China to buy less Treasury securities than they would without the pressure.
Second, much of the Treasury securities that have been absorbed in the second half of 2008, have been the result of a flight to safety. Once the markets calm down, the flight to safety will be reversed. Thus, not only will the Treasury market have to deal with newly issued Treasury securities as a result of a $900 billion deficit, but with the liquidation into the market of hundreds of billions of Treasury securities purchased in the second half of 2008.Can you say higher interest rates and inflation in the same sentence?
There is no way that so many Treasury securities will be able to be absorbed into the market at anywhere near current rates. Thus, we are likely to see a combination of rising interest rates and huge Federal Reserve purchases of Treasury securities. It will all be very inflationary.
The only sane option is for the United States government to declare bankruptcy. Super-inflation or bankruptcy, those are the only options folks. The empire is crashing. Talk of larger "stimulus" packages, and "we will worry about the deficit later", is insanity. The deficit is not going to wait. Be ready.
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