In the last few weeks, more bad news was released about the actions and composition of U.S. Treasury debt holders. What this presented was a snap shot of an increasingly vulnerable U.S. public finances (and ultimately economy) dependent on constant infusions of cash in exchange for debt.
Foreign creditors have long been among the most stalwart and significant of U.S. Treasuries buyers and long term holders out there. Yet this has at long last begun to decline, and it is a troubling development to say the least. For the 12 months that ended in October, the total non-U.S. resident inventories of American Treasuries declined by a sobering $124.5 billion.
Keep in mind that the two largest buyers and holders of U.S. foreign debt have long been Japan and China (now China and Japan). These two nations and their governments represent the two biggest investors in American government bonds. Yet they have both simultaneously reduced their combined holdings by $128.9 billion. Remember that all of this happened at the same time as they together ran a whopping $400.5 billion in trade surplus balance of trade with America for only the first ten months of 2018. This chart tells the tale, showing the worrying trend in U.S. Treasuries:
What does this mean for the U.S. federal government’s ongoing ability to continue financing itself, much less expanding on its mountain of ever growing debt? Any way that you look at it, this isn’t good news. The moves are hard to fathom based on the financial facts on the ground. Neither Japan nor China were willing to recycle any of their $400.5 billion in new U.S. dollar holdings off of these enormous trade surpluses back into Treasuries for the first time in recent memory. Worse still by far, they actually actively net sold their existing Treasury assets positions.
This is a dire warning message. Actually the Japanese and Chinese are telling us several important things with these crucial actions that they have recently undertaken regarding our Treasuries. On the one hand, their sales are hedges in light of the broadly anticipated increases in U.S. interest rates.
At the same time though, there is a political undertone from both wealthy Asian nations. Japan is downright worried about the upcoming U.S. trade negotiations. They may have opted to finally express some of their frustration and feelings of impotence by doing something powerful like net selling off their U.S. Treasuries. This would enable them to keep the $56 billion in new trade surpluses plus to cash out some of the Treasury bonanza as well. It would be a calculated but understandable move from their uneasy point of view.
China is more complicated. Their trade negotiations with America are not going so well. The Chinese and Americans have a number of ranging grievances that extend far and deeply beyond simply trade.
Under the microscope are the maritime borders of mainland China, relations with Tibet, American weapons sales to Taiwan, and widely separated understandings on Korean peninsular peace and nuclear disarmament. China has been suffering economically and has more on the line. Pulling home some of that fabled Treasury money would allow them more cash in their war chest to use to prop up their sagging economy that has become a real casualty of the ongoing trade war with the U.S.
Is Your Retirement Portfolio Prepared for the Abandonment of U.S. Treasury Markets by Foreign Governments?
It is hard to reasonably blame the Asian economic powers for defending themselves when they feel their core interests are under attack and threatened these days. From their points of view, pulling home some U.S. greenbacks makes their defensive positions that much more sustainable. When the world abandons globalism in favor of looking more inward, gold is the one and only single asset class on the planet that delivers you over three thousand years of value-hedging properties. Only a fool would ignore its legendary capital-preserving powers in distrustful times like these.
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