Think isolation. Think monetization. Think trapped. Think Catch-22, no remotely viable option. Think motive for propaganda. Think end of the road in a gigantic USTreasury bubble, in the process of discredit. Think last resort of monetization, due to the absence of bidders at USTreasury auctions. Think pressure like a vise. The USGovt is in a great big bind and chooses not to discuss it. As European nations ponder the plight of sovereign debt default, the United States compares an order of magnitude worse from deeper insolvency. A default closer to home is considered unthinkable. So was a broad mortgage market breakdown. So was an endless housing decline. So was an insolvent broken banking system. So were consecutive $1 trillion federal deficits. All were forecasted here.
BOND BOYCOTT LED BY CHINA
Call a spade a spade! The Chinese, trade partner turned adversary, have been in boycott of USTreasury Bonds for a year. While still a significant creditor for USGovt debt, it also stands as the primary adversary in the movement to displace the USDollar from its global reserve currency, a veritable throne of privilege. Arabs and Chinese are mentioned consistently as the most important creditors for official USGovt debt. Something of note happened in 2006 and 2007. The Japanese stopped adding to their USTreasury Bond holdings. The slack was taken by China. Now something has happened again. China has stopped purchasing the USTreasury debt securities. The United States has been set up for acute risk in funding its debt. The response is clearly to be a greater dependence upon the printing press, as the USGovt will be forced to finance its debt through monetization, perhaps almost exclusively. This is the closest one might ever see of a major industrialized nation engaging in behavior best described as Weimar-like. And US economists reward its chief monetary mechanic with a national award! We witness the ultimate in moral hazard, even its celebration.
The war of words continues with China. The leaders and officials in Beijing have delivered salvo after salvo against the weakened US fortress for months. They direct volleys the deficit flank, the currency flank, the tariff flank, the reform flank, and others. They have led the rebellion to remove the USDollar from exclusive usage in international trade settlements. They have endorsed the phase-out demise of the Petro-Dollar. The deputy governor of the Peoples Bank of China had some stern words recently. Zhu Min from the PBOC said, "The United States cannot force foreign governments to increase their holdings of Treasuries. Double the holdings? It is definitely impossible. The US current account deficit is falling as resident savings increase. So its trade turnover is falling, which means the US is supplying fewer dollars to the rest of the world. The world does not have so much money to buy more US Treasuries. [It is] getting harder for governments to buy United States Treasuries because the US's shrinking Current Account gap is reducing the supply of dollars overseas."
This is a double whammy. Foreigners have less US$ funds to buy when USTreasury supply is exploding, due to smaller US trade gaps and smaller foreign trade surpluses. The outlet is USFed monetization to purchase the official bond supply using printing press funds, a last resort source of money. Asian economies have their own challenges. Gone is the Japanese trade surplus. China, on the other hand, is openly sick & tired of financing a government debt when the direction has not been set toward progress or reform. Improvement of the USGovt finances seems NOT a priority in the eyes of foreign creditors. Zhu was as plain as possible, that the USGovt should no longer rely on China for funding its bottomless deficits. Conditions are extremely likely to grow worse, with more desperation to finance deficits that in no way are reduced. The Fed has no choice but to turn the monetization machine on hyper-drive. A chart accentuates the problem and exposes the risk, thanks to RBS bank.
China has made two important changes in their USTreasury management. They have converted much long-term debt securities into short-term debt securities. They have also stopped buying short-term USTreasury Bills almost completely. See how China has sharply reduced their short-term USTBill support (US S/T in brown), which fell off a cliff since summer 2009, when it was an annual outlay of almost $200 billion worth, but now is next to zero. Shown are rolling 12-month sums, meaning around May 2009 the previous 12 months totaled around $190 to $200 billion. As of October 2009, their assembly of USTBills has been nil for a year!! Their long-term USTreasury purchases remain steady (in light blue) in the $90 to $100 billion range, again summed over the last 12 months.
Look more closely at the complex chart above. Notice the very serious dumping of USAgency Mortgage Bond, from a level with running 12-month total near $75 billion in the early summer 2009 to minus $25-35 billion in the last 12 months. Clearly, Beijing leaders have ordered a halt of USTBond purchases. Major entities are selling huge amounts of USAgency Bonds. The Chinese Govt has been selling mortgage backed securities almost as fast as PIMCO. However, they have halted the purchase of USTreasurys. Since May 2009, Chinese USTBond holdings have been flat at $790 billion. The USGovt is more isolated nowadays, left to its printing press device to handle the avalanche of debt. The US financial networks are mum.
Imagine, the US recession does not produce enough trade deficits for foreign sources to recycle, perversely. It sounds crazy. A recession will do that, like one that stubbornly refused to end. Going hand in hand with stronger and more robust economic activity inside the US fenceposts is huge trade deficits, no longer seen. This is yet another ongoing recession signal, since the October trade gap was ONLY $32.94 billion, grossly inadequate for foreigners to purchase USTreasurys. Foreigners have less US$ funds from trade to devote to USTreasury conversion, thereby avoiding the currency lift at home. The experts call the process sterlization, since the new US$ money does not convert, does not push the local currency higher, does not interrupt via a feedback loop the export trade that produced the surplus in the first place. Export of USTreasurys is the nastiest, most sinister, most effective device in creating gigantic unresolvable global financial imbalances.
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