2009-01-09

China cooling on US debt

Naked Capitalism has the lowdown here. Quotes:
Separate and apart from China's changing fortunes, the continued purchase of US debt was becoming controversial in bureaucratic and popular circles. The tone increasingly was that China had been snookered into buying lousy US paper. And since the regime had depended on continued growth to maintain legitimacy and social cohesion, the officialdom will need to find scapegoats for the downturn. Regardless of where one thinks the truth really lies, it's a no-brainer that the US will become a leading culprit.

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I hate to say this, but if China were to be rational about their Treasuries, they are a sunk cost. Will China realistically ever see 100 cents per dollar invested? The answer is certain to be no. The US is out to create inflation (as a matter of policy, to avoid deflation taking hold). In addition, the massive federal deficits in the pipeline, plus the high odds of a somehow cosmeticized bailout of the Fed down the road (it has been hoovering up crappy assets certain to be worth less than their reported value) will necessitate a default via inflation. And since China has run double digits inflation, they really can't complain if we go that course. And that's before we consider that the powers that be, like just about every economy in the world, presumably want their currency to be weaker (a weaker dollar would also erode the value of US government paper). How that race tot the bottom plays out is anyone's guess.
In short, the US economy is pretty much in China's pocket. With a massive trade imbalance going back decades, this was always going to happen, but no one listened.

Either China will have a disproportionate influence on what Congress and the Fed do from now on, or the dollar will crash.

As I have said before - there is no logical reason why anyone would want to invest in the US at the moment - the sharemarket has crashed, the property bubble has popped and treasuries are offering less than 1% interest. At some point investors will realise that they can make more money outside the US.

3 comments:

Anonymous said...

Why would investors make more money elsewhere? Aren't things just as bad or worse financially and economically in the rest of the world?

Neil Cameron (One Salient Oversight) said...

On the downside yes, but not on the upside. (ie the longterm US outlook is very bleak compared to other nations, who will recover their economies faster).

Remember - the source of the problem is the US, not Europe or Asia or anywhere else. These other nations naturally suffer as well since they have lost investments in the US, but it is the US that will bear the brunt.

Think of the US as a company listed on the stock market that has just announced massive losses and will be unable to pay dividends for some years. Companies who had invested in this one company would suffer great losses, but the company itself would be the worst hit. Its share price would naturally drop as investors panicked.

Check this page out: 3 month treasuries in the US are 0.20%. 3 month European bonds offer 2.82%. 3 month Australian bonds offer 3.97%.

In other words, there are plenty of other investments around the world that are already looking very attractive to US bondholders.

Unknown said...

"Think of the US as a company listed on the stock market that has just announced massive losses and will be unable to pay dividends for some years. Companies who had invested in this one company would suffer great losses, but the company itself would be the worst hit. Its share price would naturally drop as investors panicked."

Sounds like a great time to invest - bargain time.

On the uber simple maxim of "buy low, sell high", China's problem is, on the face of it, that they bought high.