Foreign Central Banks’ US Treasury Holdings

There’s talk of foreign central banks purchases of US Treasury debt slowing down, or even significant reductions in their current Treasury bond holdings.  Unfortunately, authors seldom share their work with the readers of their articles.  But I’m the kind of guy who creates his graphics first, and then writes my comments based on what I see.  My readers may disagree with my views, but I give them the data I use so they can come to their own conclusions, which is fine with me. 

From the US Treasury’s website listing: “MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES”, I’ve accumulated data going back to May 2008.  I have no doubt that foreign central banks’ holdings of US Treasury debt are in these numbers, but I can’t rule out the possibility of foreign insurance companies and pension funds Treasury’s holdings are also included in the data.  However I find it hard to believe that the Federal Reserve or US Treasury would provide this service for any organization other than a central bank.  But for the purposes of this article, it doesn’t matter who owns these Treasury Department IOUs.

http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt

Included in the following tables are only the countries that have had constant listing in the Treasury’s web site since May 2008, as sometimes countries with only a few billion dollars of US T-debt have been added or removed from the list.  There is a catch-all category for counties not on the list, but still holds US T-debt at the Federal Reserve; “All Other” (#8 in the table below).   Currently, the Treasury has updated the data to August 2013.

Columns in the tables are as follows from left to right;

•         August 2013: Latest data
•         Max Value:  Largest figure published from May 2008 to August 2013
•         Min Value:  Smallest figure published from May 2008 to August 2013

These columns are in billions of dollars.  The last two columns are in percentages, giving the percentage changes of the August 2013 values from the maximum and minimum values shown in the Max Value and Min Value columns.  For example, looking at these percentage columns for #1 (Grand Total) informs us that the August 2013 values are 2.32% below the max value and 116.02% above the minimum of the past 5.5 years.  So as of August, there hasn’t been a significant exodus in total US T-debt held at the US Treasury by foreign holders.  But since May 2008, just months before the mortgage crisis, these foreign holders have increased their positions by over 100%, and that seems like a large increase.

But what are we really looking at in this table?  I’d expect mostly the accumulation of US trade deficits going back to a time before John F Kennedy was president.  Now I doubt this is true for #4 (Caribbean Banking Centers).  What in the heck could these countries have imported to the United States to explain a trade imbalance of $300 billion dollars; the Pirates of the Caribbean’s plunder?  Maybe; however the most likely answer would be we are looking at the US Treasury bonds purchased by hedge funds working as agents for Washington’s Plunge Protection Team.  But for #2 (China) #3 (Japan) and #6 (Oil Exporters), trade imbalances are the best explanation for such a large position in the US Treasury market.

The chart below is not the total US trade imbalances, but the reported monthly additions to it.  If you wanted to know how large the total trade deficits are, sorry I don’t know where to get that data.  I suspect it would be reasonably close to the Grand Total (#1) in the table above; $5.588 trillion dollars.

In Barron’s Pulse of the Economy, they also publish monthly US Imports and Exports data.  As you can see, the United States purchases more than it sells to the rest of the world, and only the United States can do this for decades as we control the volume of the reserve currency (US dollars) circulating in the global economy.  Note that the differences in the import and export figures below don’t exactly match the trade imbalances we see above.  However, note that each data series has responded to the high-tech (2000-02) and mortgage crisis (2007-09) bear markets.

Since 1993, these figures have increased greatly.  But the data is in dollars, not in units of stuff, so one has to wonder if the units being traded has actually increased or if the prices of what is being imported and exported are just going up because of dollar inflation.

Trade deficits (unequal trade) work like this; the United States in the following example sold a million dollars’ worth of Californian wine to France, who in turn sold two million dollars of French wine to the United States.  How much the individual bottles of wine cost depends on what the market is willing to bear.  It may be that America has shipped as much wine to France as France sold to the United States, but Americans are willing to pay twice as much for French wine as the French are willing to pay for Californian wine.  No matter, as the fact is that there is a trade imbalance of one million dollars in the commerce involved.

During the days of the pre WW1 gold standard, before guns of August 1914 destroyed it forever, trade imbalances would be settled in gold when the trade tallies were reconciled by the respective banking systems.  In the above example, a million dollars in gold would be debited from the United States’ account, to be credited to France’s.  Under the gold standard, such a trade imbalance could continue only for as long as the United States’ gold reserves lasted, at which point the United States could only purchase as much wine from France, in dollar terms, as France cared to purchase wine from California.  The advantage of the gold standard for international trade is that it would not allow the global economy to pileup trillions of dollars in debt from trade deficits (as seen in the first table), as the money used in global commerce had to be backed, and were exchangeable with a limited amount of gold held by the issuer of a nations’ currency.

Another advantage of the old gold standard was that it encouraged thrift while penalizing wasteful extravagance through deflation; because gold as money gained purchasing power over time.  No thirty year mortgages in a gold standard; deflation would make such long term loans a heavy burden on both the debtors and creditors alike.  So, people a hundred years ago had to save money to purchase big ticket items as banks were places where people deposited their money, not places go to for "buy now and pay later" credit.  What did banks make loans for when gold was money?  Mostly short-term loans for business inventory, and such loans were self-liquidating when business sold their inventory in the course of their operations, making the average bank a safe investment for their depositors’ money.

Today, banks don’t care about depositors as they have access to all the money they want from the Federal Reserve, at almost zero percent, for their double-digit interest rate consumer loans.  The American banking system enjoys crony capitalism at its finest!

Unlike what today’s economists on TV would have us all believe, a gold standard, with its limited currency, does not limit actual economic growth.  In the 19^th century, the world’s monetary was firmly anchored by gold.   This was a historical period where huge industries of mass production were formed, each offering goods and services never before available to the market.  This happened when the global economy was operating with a money supply fixed by the amount of monetary gold available.  Ocean going ships in 1800 were made from wood for a damn good reason; steel was in a limited supply and so cost too much.  By 1900 steel became so abundant, and cheap, wooden sailing ships became antiques.  Steel mills in the post-Civil War economy never had a problem supplying affordable steel rails for the expanding rail-road network, or shipyards and they welcomed the introduction of automobiles to the steel market at the turn of the 20^th century. This was all done during the gold standard, and typically with falling prices.

But banks (central banks included) and governments don’t like gold as money.  Gold as money limits banks’ ability to expand currency, credit and so their ability to make their profits and expand their malign influence in society and government.   Governments hate gold as money as it limits the largess of politicians to whatever they can extract from their captive population and commerce by taxation.  But all that changed after World War Two. 

Bretton Woods Monetary Accords of 1945 may have placed global commerce on a $35 an ounce gold standard, but the US Government soon began issuing more paper dollars into circulation than just 35 for each ounce of gold the US Treasury held (see chart below).  A run on the US gold reserves began in 1958.  As a result of paper dollar inflation, price stability in consumer goods and financial assets became a thing of the past.

These inflationary dollars were spent into circulation by bureaucracies overseeing government programs that gave dollars to people who could get funding in no other way.  “Social Engineering” / “Urban Renewal” (much used terms by academics in the late 1940s and 1950s) and funding for academic studies to make these jingoisms become a reality that remains elusive a half century later, come to my mind as examples of what government spends its inflation on.

If tax funding was in short supply, the Federal Reserve would just “monetize” the required amount of US T-debt, providing inflationary funding to both Washington and the banking system, at the expense of people who got their US dollars in the old fashion way: working for them.  After Nixon closed the Treasury’s gold window, meaning that foreign central banks could no longer exchange their depreciating paper dollars for the limited supply of US gold, the US dollar and Treasury debt began to function as gold once did in settlement of international trade.  

The US dollar is the global reserve currency, accepted for payment for goods and services the world over and here is why this is a problem; it allows the US to consume without actually producing anything in exchange; except the dollars spent.  Take my above example of French and Californian wine commerce.  What happens should Washington create a million inflationary dollars via the Federal Reserve monetizing Treasury debt and use the proceeds to purchase French wine?  Washington has created a million dollars in demand without having to first produce a million dollars in real goods and services for the market that could be exchanged for French wine.  This is called counterfeiting if you or I did this.   But when Washington allows its creature; the Federal Reserve to legally do this, it’s called “monetary policy.”  So when the French wine merchants accept this million dollar increase in demand and ship their wine to the United States, the US benefits from receiving real economic goods, but France only sees a million freshly printed dollars. 

Can’t the French take the million dollars and buy American goods with it?  Look around your house, what’s made in America anymore?  What the French will do is what everyone else does with their US dollars that can’t be used to purchase American consumer goods, they’ll use their dollars to purchase something manufactured in China, Japan or Germany. 

Can you blame China for wanting its yuan to replace the US dollar for global trade?  I can’t!  Who I blame for this sorry situation is the Democratic and Republican parties, and the academics that have advised Washington’s political elite, and managed American “economic “ and “monetary” policies for the past eight decades.  There is some hope for the media.  It only took three years before they discovered how Obama and the rest of Washington’s Democratic establishment lied to them about Obamacare.  My first clue that something was wrong was when Obama and his democrats decided that what American really needed was to take its first step towards the old Stalinist medical system.

Well I have some good news, and some bad news.  First the good news; China (#24 in the table below, sorted by the Percent from Max Val column) has only sold 3.56% of its US Treasury “monetary reserves.”  The bad news?  The day is coming when they’ll be selling much more than that.

I realize there are many reasons for a nation’s central bank to liquidate a portion of their monetary reserves.  Like all of us, there are times when even central banks need ready cash.  But look at #1-14 in the table; these are double digit percentage reductions in the holdings of these central banks US Treasury reserves.  Are all these central banks selling US Treasury debt to raise cash, or are they placing a distance between themselves and a pending debacle they know is coming in the US Treasury market? 

Currently, the news outlets are still speculating whether the Federal Reserve will begin to taper its QE program sometime early next year.  Look at the tables giving central bank holdings of US Treasury debt above and the plots in the chart below.

I doubt the Federal Reserve can do anything but INCREASE its purchases of US Treasury debt in 2014.  It’s reasonable assuming that these central banks will continue to reduce their US Treasury’s positions because Washington will continue to go deeper into debt, and the Federal Reserve will continue monetizing Congress’s unpaid IOUs in the US Treasury market.  The US Treasury and Federal Reserve have been doing this since the end of World War 2.  Do you believe they will stop sometime in 2014?  I suspect the global central banking “community” would disagree with you!

If the Federal Reserve wants to keep US interest rates lows, and hundreds of trillions of interest-rate derivatives currently on the books of American banks out of the money, the new Fed Chairwoman, Janet Yellen, will be forced to increase her purchases of US Treasury debt to compensate for the overseas’ central bank sales of Treasuries.  Her only other choice would be to allow the current house of cards called the American financial system to descend into a depression that will rival the Great Depression of the 1930s, a depression that was also caused by the imprudent expansion of credit by the Federal Reserve.

As always, the “news” outlets will tell us all about it – a year or two after it happens.

Mark J. Lundeen

[email protected]

* * *

I didn’t write the following, Karl Denninger did, but I really liked it and want to pass it on.  If after reading it you still don’t understand why buying some gold and silver for protection of your financial health is an absolute necessary, well there is nothing else I can say.

Mark

2013-10-30 15:21 by Karl Denninger

in States , 267 references

From The "Duh" File - Detroit Pensions

This sort of story illustrates the utter and complete crap that our media puts out.

"The benefits that we got, they weren't given to us. They were earned. These guys worked their asses off for said 30, 40 years, sacrificing life and ... health. The least they could do is have some sort of security after they're gone, after the fires are out."

You forgot the rest of the story.

For 30, 40 years you threatened and extorted the people of Detroit.  You lobbied, petitioned and voted for that which you either knew or should have known was impossible to provide.  You threatened to not put out fires if you didn't get these promises in the form of pensions and medical benefits, effectively putting a gun to the head of everyone in the city.

You forgot that irrespective of how much pressure you applied and how loudly you screamed, whether you threatened not to extinguish fires and go on strike or not and no matter how many signs you waved and sob stories you told to the electorate, it is not possible to make something that can't happen occur.

You can't jump over a building and a contract to do so is void and unenforceable because you contracted to do an impossible thing.

The blame for this lies both with you and with city management.  The city made a promise it couldn't keep but you demanded the promises that you or your union bosses knew were impossible, and if you didn't know it was only because you willfully and intentionally ignored fifth grade arithmetic.

If you voluntarily place a gun in your own mouth and pull the trigger absent a malfunction you are going to blow your brains out.  That is a certainty.

Likewise it is a certainty that two exponential growth functions, where one rate of growth is higher than the other, will inevitably run away from one another.  When the higher-growth rate is an "obligation" and the lower is "revenue" bankruptcy is inevitable.

When you "contract" to do such a thing it is an utter certainty that if you live long enough you will not get paid in full and you might not get anything.

You thus contracted with someone to do an impossible thing and you either knew it was impossible or willfully ignored the fact that it was, when all you needed to understand to know that in advance was to have been awake during your fifth grade math class.

The same situation, incidentally, applies to Medicare -- that is, Senior Citizen medical promises.  The federal promises alone are north of $200 trillion, not the $17 trillion that we "recognize."

This very same financial fact also applies to virtually all state and local pension and in-retirement medical plans, along with most private pensions, for the exact same reason.

I think it sucks that you're not going to get your allegedly-earned "benefits" but the money to pay those benefits never existed and was never going to.

This is exactly identical to knowing you make $27,000 a year, spending $37,000 a year, having $170,000 on the credit card and then whining that it's "unfair" when the card company won't let you run up another 10 large.

This, incidentally, is our Federal Government right here, right now, today -- just add the zeros to the above and you get our tax revenue, our spending, and our federal debt.

We, as Americans, must stop living lies right now because it is only through facing the truth that we can plan for the fact that we lied to ourselves and demanded that others lie to us, and thus that which is impossible is not going to happen.

Or we can keep doing what we've been doing and you, like this gentleman, can then claim to be "surprised" when the inevitable and known in advance occurs.