What does it mean when so many overseas investors — governmental, corporate, and institutional — are hungry for US paper?
There are a variety of potential explanations: Yield is relatively attractive here, its a safe investment for those looking to move cash away from their native countries. For exporters, buying US Treasuries helps pressure rates down, thus financing additional consumer spending. Floyd Norris writes: "The vast majority of foreign Treasury purchases came from private foreign investors, who presumably were attracted by the yields and by the fact that the dollar gained in 2005 against the Japanese yen, the euro and the British pound, while falling less than 3 percent against the Chinese yuan."
The United States is politically stable (despite red/blue divisions); Nor does it hurt that we have an unblemished track record of paying our sovereign debts — even with all of the economic imbalances of recent years or the past.
Here’s what the past 3 decades of foreign purchases looks like:
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click for bigger graph
courtesy NYT
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Here’s the details, via Norris:
"GUESS who’s financing the budget deficit of the United States? Hint: Very few Treasury securities are being purchased by American consumers or businesses.
The federal government released its calculations this week on net investments in United States long-term securities, and found that foreigners had invested $350.8 billion in Treasury bonds and notes in 2005. They were net sellers of short-term Treasury bills, so their total Treasury holdings grew by just $290.9 billion.
Even so, the United States Treasury says that Treasury securities held by the public — that is, by everyone except the Federal Reserve System and other arms of the government — rose by $306.4 billion. That means that 95 percent of the deficit was financed overseas.
Actually, foreigners are becoming a little less generous. In 2004, they bought $357.8 billion of Treasuries, 98 percent of the growth in outstanding Treasury securities. Over all, foreign investors bought a net $1.05 trillion in long-term American securities in 2005, the first time the number had gone to 13 figures. That was up 14 percent from 2004.
The gain last year showed increasing foreign trust in American corporations. While United States government and agency securities got most of the money, the increase largely came from a greater willingness to buy corporate bonds and stocks. Foreigners put a net $391.7 billion into corporate bonds, 27 percent more than they had invested the previous year and the largest amount for any year on record."
Let’s hope they don’t change their collective minds anytime soon . . .
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Source:
In Long-Term American Treasury Securities They Trust
FLOYD NORRIS
NYT, February 18, 2006
http://select.nytimes.com/2006/02/18/business/18charts.html
Could US hedge funds, incorporated in Cayman Islands or wherever, have also something to do with it?
I am surprised the original NYT did not care to mention that when central banks or other public actors buy through private intermediaries, say in London, these transactions get classified as private in the data. Yet, what’s surprising is the strengh of the foreign demand for corporate bonds. Do we have any idea about whether Asian central banks (and in particular the People’s Bank of China) have a habit of purchasing or have begun purchasing corporate bonds with their accumulated dollars?
Jean-Philippe Stijns,
Dr. Setser and his notable blog commentators have had thorough discussions on this complex topic. For example-
http://www.rgemonitor.com/blog/setser/117295/
Lot’s of players, and high stakes are involved in supporting a fiat currency as heavily leveraged as this one.
Bit of an unpleasant slope down on this bell curve.
speaking of corporate bonds, this 2003 essay from John Hussman is worth a reread:
http://hussmanfunds.com/html/debtswap.htm
Foreigners are causing a bond and stock bull market………………………
Do they fall for irrational exuberance?
“Let’s hope they don’t change their collective minds anytime so”. And if they do what will happen? NOTHING!!!!!!!!!! Everyone, think past your nose.
Given 1. the ongoing and ever-growing mess with the Federal Budget and 2. The Bush administration’s advocacy of defaulting on SS bonds, I can’t imagine who would want to buy our Federal debt if they didn’t have to.
I don’t anymore.
Norman,
you don’t seem to have thought about this enough.
The Federal government is spending more revenue than it is taking in, makes up the difference by massive borrowing from other countries, as the U.S. is tapped out (no net savings).
The U.S. has to eventually pay this back; not as greenbacks but as goods and services that are valuable to the rest of the world. Note however, that we have a massive Trade Deficit – we like the goods/services from the rest of the world considerably more than they like what we have to offer.
A world of hurt doesn’t even begin to describe what would happen if one of our major creditors declared us bankrupt and uncreditworthy.
Patrick G
Unfortunately you’re dead wrong. The US does not have to pay this debt back in goods and services that are valuable, but in greenbacks. This is very serious for us, but arguably even moreso for our creditors.
In the absence of infinte international altruism, regarding the federal debts, there are three ways to deal with it. 1) Taxes high enough to balance flows (will never happen for political and economic reasons); 2) default (almost certainly won’t happen. 3) Simply create the greenbacks required out of thin air.
Which leads to another point. The interests are quite aligned here between the massively debtor government and indebted citizens. Further, deflating the dollar value passes the burden onto foreigners, another reason to do it.
Of course we face high prices and high interest rates, but unless the kindness of strangers goes on forever, they’ll pull the rug out from under the dollar anyway, leading to the same scenario.
I can’t see a way out of this scenario that doesn’t involve inflation and large scale dollar devaluation (followed by a major US standard of living adjustment, a big recession as US business adjusts and perhaps some deflation).
Either way the US standard of living adusts to more accurately match the value we bring to the world. How it happens without the above is mystery (to me anyway).
What about this scenario:
The negative savings rate can’t fo on forever and sooner than later it will go back up. This means American demand for foreign goods will decrease. Foreigners will have less money to invest and Americans will start funding their own deficit keeping interest rates in line and their currency more or less stable.
Government spending will keep on increasing to support the economy that will suffer due to consumer saving. Since government debt is less than 50% of GDP, much lower than many other countries, there is a lot of room still for government to maintain its spending spree.
As the US government increases its debt level and starts showing its true badly managed socialist colors through a conservative spin, Europe will look more and more competitive as Asians prefer their luxury products over American stuff.
RN,
keep in mind, the only thing which backs the currency is the government’s willingness and ability to extract real value from its populace via taxes.
If we attempt to inflate our way out of this crisis instead of raising taxes, everyone who can will dump their greenbacks for whatever better alternative is available to them.
Inflating the currency would kill its value, it would become as worthless as Weimar Republic scrip.
D.,
The only way to increase savings is to a massive cut back on expenditures by consumers so that outgo is significantly less than their income. Since consumer income is currently under outgo, any such change would shrink the economy.
A low savings rate means that there is no slack in the system; if the government needs to increase its revenue by taxing the aforementioned consumers, it would force a cutback on expenditures, which would shrink the economy (and not increase savings).
About the only thing that could right the imbalance quickly would be to raise taxes on those who have significant savings and shut down our Military and redirect that money towards paying off our debts.
And if you can’t see that happening, then I suggest we’re going to be in for a very painful economic Depression.