China Daily asks who will 'feed' the US? and
provides a good overview of the issues facing the treasury market.
(emphasis mine) [my comment]
will 'feed' the US?
Updated: 2009-04-01 11:38
The United States, the world's most developed country, is scrambling to
answer the question "Who will 'feed' the US?" [Answer: “no
one”] years after it had asked the most populous developing country a
similar question: "Who will feed China?"
Is it sensational to ask the richest country the same question that China
faced more than 10 years ago? The reply is "No." This time, it is
not about "grain supply", but "capital supply" and
"supply of order."
An unprecedented financial crisis that originated in the US is shattering the
world, without exception to any region. In response, the US has announced
massive rescue plans to revive the economy, and is ready to roll out more
such plans, yet leaving a big question mark as to how it will get enough
money to finance those plans.
The US Congress sanctioned a $787 billion stimulus plan submitted by the
Obama administration last month, which media reports said is only a small
fraction of the overall plan.
The US-based San Francisco Business Times reported on Nov 26 that the US
government and the Federal Reserve is harboring a huge $8.5 trillion rescue
plan, or about 60 percent of the country's GDP.
US President Barack Obama is expecting a record $1.75 trillion in federal
fiscal deficit this year. The fiscal figure reached a high of $459 billion
This year's deficit would account for 12.3 percent of the GDP, the highest
since the World War II and far exceeding the recognized 3-percent alarm
In addition, Obama also foresaw an average $1 trillion in deficits each year
for 2010 and 2011.
Many US experts said Obama's estimate was too optimistic [Agreed],
and the actual deficit would be even bigger, as the president excluded the
country's liabilities in his projection.
Where does the money
come from? [Answer: “printing press”]
Who will be able to provide the financial support for the enormous fiscal
deficit of the US government?
The US Treasury Department estimated the US government would issue up to $2.56
trillion of treasury bonds this year, and at least $1.14 trillion more next
year. [It will be far more.]
By the end of last year, outstanding treasury bonds stood at $10.7 trillion.
About 29 percent, or $2.862 trillion, is held by foreign governments or
investors. That means the country's reliance on overseas investors holding
treasury bonds has been raised by 10 percentage points from eight years ago.
"The world simply cannot buy any more new issuance of US treasury
bonds," [Agreed] said Yu Zuyao, an honorary economist with
the Chinese Academy of Social Sciences (CASS), who used to head the CASS
Institute of Economics.
Many countries have their own hands full, like the US, using their capital to
counter the financial crisis, consolidate their financial system, and fuel
their own stimulus packages to revive the real economy, even though they have
some foreign exchange reserves in US dollars.
Thanks to trade surpluses, emerging economies hold a combined $5.5
trillion in forex reserves [more when sovereign wealth funds are added in],
but most of the reserves have already been used to buy US treasury bonds,
said Yoko Kitazawa, an expert on international affairs, in a February issue
of Sekai (The World), a Japanese monthly journal.
However, trade surpluses of these regions and countries are eroding
because of a collapse in global trade.
As a result, forex reserves of these regions and countries are expanding at a
slower pace, or even declining. The latest forecast from the World Trade
Organization said global trade may shrink by 9 percent, or more, this year.
As the largest holder of US treasury bonds and the world's second largest
exporter, China had seen exports decline since November last year, with its
actual use of foreign capital falling since October.
Media reports said China's forex reserves may have decreased by more than $30
billion in the first two months. China's forex reserves stood at about $1.95
trillion at the end of last year, the largest in the world.
The Xinhua-run newspaper Economic Information Daily reported this month China
had liquidity of only $300 billion to $500 billion in forex reserves, citing
a report from an unidentified ministry-level research institute.
Crowding out effect
of US capital pool
Yang Bin, also a CASS economist, said the US was luring capital scattered
all over the world to pool in the US by floating excessive treasury bonds,
which could be a threat to developing countries which are crying out for
capital. [The US treasury market is sucking the life out of the world
economy. Capital needed to fund economic growth in developing countries is
being used to bail out doomed US financial institutions via treasury sales.
The sooner the treasury market and the dollar collapse, the sooner the world
can begin to heal.]
Economic development in many developing countries is, to a large extent,
counting on such an influx of overseas capital.
The US-based Institute for International Finance warned in January that
capital flows into emerging markets are in danger of collapsing this year as
a result of the financial crisis.
The association of large banks estimates that net private sector capital
flows to emerging markets will be no more than $165 billion this year, which
is less than half of $466 billion in 2008 and only a fifth of $930 billion in
The crisis and a global economic recession are also aggravating the world
poverty. The United Nations said in a report published this month that
reduced growth this year would lead to a total income loss of around $18
billion ($46 per person) for 390 million people in Sub-Saharan Africa living
in extreme poverty.
The projected loss represents 20 percent of the per capita income of the poor
in Africa, far exceeding the losses of developed nations.
The majority of low-income nations, or 43 out of 48, are incapable of
providing a government stimulus for the poor, according to the report.
In addition, the excessive US treasury bonds, its enormous fiscal deficit,
and issuance of the dollar that far exceeds the demand of the economy would
drive the world nearer to inflation and a depreciating US dollar. This could
be another heavy blow to the world economy in a downturn and to developing
countries in particular.
Worries over dollar-denominated assets
"The immense 'US treasury bonds bubble' has not only badly weakened
new demand among investors, but also put foreign investors in danger of
seeing their dollar-denominated assets shrink in value," [Agreed] said
The US Treasury Department said the US government bonds held by foreign
countries were down by $4.7 billion at the end of January from a month ago.
This is the first time for other countries to sell US treasury bonds since
China's purchase of US treasury bonds decelerated. The country purchased
$12.2 billion in treasury bonds in January, the smallest monthly increase
since the second half of last year.
Capital is fleeing the US in January, foreign investors sold $43 billion of
long-term US bonds, compared with an inflow of $34.7 billion into the
The US is facing a capital account deficit of $148.9 billion, if short-term
bonds are included, as foreign governments and institutions became reluctant
to buy more US bonds. The deficit compares to $609.9 billion in surplus for
the whole of 2008.
Returns on US government bonds will be down by 2.69 percent in 2009,
according to the Caijing Magazine, citing a treasury bonds index of Lehman
Brothers. In 2008, returns on US government bonds were almost 14 percent.
China held US treasury bonds worth $740 billion by the end of January, about
7 percent of the total of US government bonds. In all, the country holds $1.2
trillion of dollar-denominated assets, including institutional bonds and
equity investment as well.
Chinese Premier Wen Jiabao on March 13 expressed worries over the safety of
these assets and called on the US to keep to its commitments and ensure the
safety of such assets.
More than a week ago, however, US Federal Reserve chairman Ben Bernanke,
dubbed "Helicopter Ben" for his speech about using a
"helicopter drop" of money into the economy to fight deflation, actualized
his threat to print more greenbacks.
He said on March 18 the Fed would purchase up to $300 billion of longer-term
Treasury securities over the next six months, along with an additional $750
billion in mortgage-backed securities.
It is the first time since World War II that the Fed has bought long-term
The Fed's decision to print more money to finance the purchase immediately
led the greenback to fall against all other major currencies.
The San Francisco Business Times reported the Fed's printing press is
financing about two thirds, or $5.5 trillion, of the $8.5 trillion of the US
rescue money. The Fed needs no approval from the Congress to start the
Analysts said the Fed is left with no other option but to print, with the key
interest rate staying at a record low of zero to 0.25 percent.
"The US is indeed capable of paying off its government bonds, but, what
is the real value of bunches of dollars by the time the bonds are
due," said Yang.
In a move to dispel concerns over the US extravagance in spending, the Obama
administration said it aimed to halve the country's fiscal deficit to $533
billion in 2013. The goal is based, however, on optimistic estimation of a
strong rebound in the US economy.
"People have every reason to doubt whether this could be possible,"
Over the next 10 years, the federal fiscal deficit is bound to swell as the
government will have to address the structural problems of the US social
insurance and medical insurance plans.
US economists believe that a ballooning deficit would be inevitable,
regardless of the status of the US economy.
Finding a way out
China's central bank governor Zhou Xiaochuan last week suggested the creation
of a super-sovereign reserve currency that is disconnected from individual
nations and is able to remain stable in the long run, to avoid inherent
deficiencies caused by using credit-based national currencies.
The repeated and escalating financial crisis since the collapse in 1971 of
the Bretton Woods system showed the whole world may be paying more than what
it gained from the current currency system, he wrote in an article.
As the world's reserve currency, about two thirds of the international
trade and financial transactions are priced and settled in the US dollar. [That
is a disaster waiting to happen.]
At the core of the ongoing financial crisis that started in the US are the
fundamental flaws of the US economic systems and the neo-liberal economic policies
of US that led to tremendous trade deficit, fiscal deficit and personal
credit deficit, Yu Zuyao said.
"It is not in the least a problem in US financial regulation,"
Yu said. "What is needed is to overhaul the US neo-liberalist system,
reform the current international financial system and restore the world's
economic order, otherwise, such crises will be repeated." [Agreed]
A currency is intended to serve the economy; however, Wall Street took the
lead in creating a currency-focused economy that is parallel to the real
The market value of US financial assets is $40 trillion to $50 trillion,
but market capital has been indulged to operate in away that makes financial
derivative products spiral up to more than $600 trillion in value, about 50
times the 2007 US GDP.
More than 97.5 percent of the world's capital in circulation is
speculative capital and only 2.5 percent is enough to meet the demand of the
real economy, said Yoko Kitazawa.
In the meantime, the US has long been a supreme power in the world.
The US-led developed countries are actually receiving $3.5 from developing
countries for every dollar in aid that goes to the developing countries, Yoko
Paradoxically, as the world's largest debtor with more than 20 years of
consecutive years of trade deficit, the US is witnessing, at the same time, a
surplus in capital account and in capital inflows. This is a testimony to the
unfairness in the international financial system and the global economic
"It's time to have the resolution to change it," Yang said.
"It is what the financial and economic crisis has told us."
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