The Council on Foreign Relations has done a great independent analysis of who has been buying U.S. Treasuries in 2008. In a nutshell, the US managed to place $1.3 trillion of USTs with non-Chinese investors. We urge readers to read this article, but here are their conclusions:China: bought $120 billion USTs in 2007, and $375 billion in 2008 (and a stunning $276 billion in the second half of 2008)
Central banks: bought $290 billion in 2007, and $650 billion in 2008 (a record)
Private investors: net sellers of USTs in 2007, added over $1 trillion in 2008!
The article assumes logically that central bank demand for USTs in 2009 will drop, as will Chinese purchases due to the drop in China's account surplus.
Bottom line: the majority of the tremendous 2009 fiscal deficit and the general US borrowing need will have to be financed by private investors. If China starts selling USTs or if private investors stop buying, say welcome to hyperinflation (ed. we tend to exaggerate on occasion, but do your homework... this is one scary subject). Sphere: Related ContentBookmark this post with:
2 comments:
The hyperinflation scenario seems incompatible with crashing real estate prices and debt deflation. Everything the government is doing is pushing on a string. Even if some consumer prices go up (due to government intervention), the multi-trillion dollar deflation of asset prices, and the associated deleveraging of balance sheets, will swamp such price increases. This will continue, regardless of what the government does, until the private sector has either paid down or defaulted on enough debt, so that the total debt to GDP ratio is down from its insane peak at over 300% of GDP, to something more reasonable (under 200% GDP). That is why blindly increasing federal debt can undermine recovery. The feds should only take debt onto their balance sheet at a drastically marked down level, so that the total debt to GDP ratio shrinks in the bargain. What the banks want, of course, is for the Feds to buy all that crap at their "mark to fantasy" prices, or better yet, face value.
But regardless of how soon the overall debt level declines, people will be resistant to the "consume all you can" economic model for years to come, since they were so badly burned by it. That attitude shift will constrain inflation in the future.
AS for China dumping the UST and the dollar, I doubt they are in a position to so decouple, since their current economic model is based on exporting to the US. They deliberately keep wages down to reck up big profits, a large part of which are controlled if not owned outright by the bigwigs of the Chinese Communist Party. If they try to dump the dollar, they lose their gravy train. Their purchases will decline, because their exports to the US will decline, since we will be consuming less. They will eventually devalue the yuan, so that their smaller flow of dollars buys more within China.
A lot of things will result from the ensuing trade war, but I doubt hyperinflation will be one of them.
David I believe you are correct in the short run only; longer term 2011 forward inflation is the likely outcome given the magnitude of the public debt and fiscal demand push in USA. TIPS 5 year 10 year and 20 year would seem underpriced therefore --
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