China Stepping Up Purchases of U.S. Treasury Debt

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Is the rally still on? We’re not sure. Yesterday, the Dow fell 83 points…after a weak bounce on Tuesday. We expected the rally to last until June and to take the Dow back to the 10,000 range. But anything could happen.

Gold rose $9 yesterday…back to $892.

And if you depend on 91-day T-bills for your spending money, you’re in a world of hurt. The yield is only 0.13%.

But maybe things are better on the other side of the planet. How’s China doing? Analysts are “cautiously optimistic,” says a New York Times report.

Retail spending in China is said to be up 15%.

Meanwhile, a report tells us that China is stepping up its purchases of U.S. Treasury debt.

Hmmm… Why would China be doing that? The official response to that question is that U.S. Treasury debt is not only the most abundant credit in the world; it is also the most reliable.

As to the first point, no one would quibble. As to the second, only a fool wouldn’t.

The price tag for the crisis-related bailouts, guarantees and boondoggles is nearly $13 billion. The United States is setting records, of course. The biggest budgets ever. The biggest budget deficits ever. The biggest bailouts.

The U.S. budget deficit is about 13%. It was a budget deficit of not even half that amount that pushed Argentina over the brink in 2001. What are we supposed to believe…that there is no brink waiting for the United States?

Even more curious…what do the Chinese believe?

“It’s all very strange,” said a new friend who came into our Buenos Aires office today. “Americans are clearly cutting back. Their credit cards are maxed out. Their houses are going down in price…”

On this last point, we provide a quick update. Bloomberg reports that the average house price actually went up by 0.7% from January to February. But before you begin to think that the housing slump is over, another Bloomberg report tells us that house prices resumed their slide in February – down 6.5%.

Charles Hugh Smith argues that not only are house prices still going down – they’ll never recover. He gives five reasons, which we’ve paraphrased below:

  1. Bubbles never re-inflate; instead, they go to a new sector
  2. Even if nominal prices go up, they will be undercut by inflation
  3. More likely, deflation will continue to drive down prices for a long time (Consumer price inflation just came in at a negative number for the first time since the ’50s.)
  4. The low-interest rate, low-inflation world that permitted high property prices is finished
  5. There is no demographic pressure on housing prices; the current stock is sufficient for years.

Low housing prices force Americans to cut their spending.

“But if Americans don’t buy, China will no longer have so much money to recycle into U.S. Treasury bonds. So who will buy all those Treasury bonds?”

Bond issuance is running as high and as fast as a 100-year flood. In Britain, recently, a bond auction found itself with more bonds than buyers. Could the same thing happen for the United States?

“Well,” our friend continued, “I have a darker scenario in mind. What if China had a different game plan? What if she intends to continue buying U.S. bonds as long as she can…leaving the United States completely dependent on Chinese lending? And what if she then suddenly dumps all her bonds and U.S. dollar assets? She would lose a lot of money. But the U.S. economy would suffer far more. The dollar would collapse…so would the US economy…completely. ”

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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Comments

  1. Hello.
    please ….
    “Meanwhile, a report tells us that China is stepping up its purchases of U.S. Treasury debt.”
    ….could you give a source for this statement/report ?
    From all accounts they are relieving themselves of u.s. dollars and turning them into hard asset commodities instead.
    I was not aware they are still buying into the american financial market.
    I would be very interested in seeing the source for such a remark .
    Thank you

    Interested
    April 25, 2009
    Reply
  2. “China still purchasing American Treasury debt?”.Yes most probably. China will still be running trade surpluses by keeping their current exchange rate as low as possible and selling cheaper goods to the US albeit at a much lower volume and will still be investing in US dollars,to maintain that exchange in the face of us pressure and to protect to some degree their massive investment as they continue to invest in commodities and diversify across the globe. The US has them in a position where they may have to throw some good money after potentially bad money to protect themselves whilst building for the future.They have too much invested to see it fail at this point.

    Reply
  3. I agree with interested. Too much rests on this to get this wrong.

    Reply

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