Japan's Trust in U.S. Treasuries "Unshakable". (perhaps he should have given us his definition of "shake")
“We have complete faith in U.S. economic and fiscal policy,” said Yosano, who is also the minister in charge of Japan’s banking sector and economic policy. “The U.S. dollar’s position as the world’s reserve currency isn’t under threat.”Well, Goldman is off a little from the official OMB numbers...
U.S. President Barack Obama has tried to assuage investor concern by pledging to cut the shortfall in half by the end of his first term. Obama may borrow a record $3.25 trillion this fiscal year, almost four times last year’s amount, according to Goldman Sachs Group Inc.
Now, here is a quote from my good friend and fellow analyst at the Sleepy Hollow Funds, the one and only Mad Scientist:
Currently the US will issue over 2.0 Trillion USD worth of Bonds over 1 year. That is net. Including the rollovers it will issue over 3.5 Trillion. That is the official line. My estimate is for over 4.0 Trillion total (2.5 trillion net). Over the last 2 years the Chinese have purchased close to 40% of US bonds. To keep this ratio up they will have to purchase over 1 trillion USD Net of Bonds, just this year. Bloating their US Bond holdings by over 125% in one year. But wait...we are not done yet. The rest of countries are in no position to step to the plate here. Many of them have troubles of their own and last year's record Treasury Bond purchases from the Middle East were only possible because of $100+/Barrel oil. With our Bench lineup retired or hurt or just plain unwilling to play in round 2 of "Who wants to be a Trillionaire (sponsor)?, China will have to buy close to 60% of this garbage. Ditto for 2010. China will be a proud holder of over 3.5 trillion USD of Bonds in 2 years. Now this is not a misconception, the Chinese are generally better at math than Americans. I am sure that they can see this as plain as day. I am even more sure they are not running around to their bosses saying "Sir..I figured out a way to solve our 800 Billion USD problem. We will make it a 3.5 trillion USD problem in 2 years and at that point we will sell the bonds and buy General Motors."(For the record, I have REPEATEDLY asked the M.S. to stop making numerical sense. That just does not fly here in the West, but he insists...)
Got that? For the Chinese to keep the same level of investment in U.S. Treasury paper that they have had in the recent past they will have to invest $1 TRILLION! (I feel like Dr. Evil when I say that, "Moo hahaha") in 2009 alone. What about 2010? And 2011? Oh, I'm sorry, I forgot... Obama PROMISED to cut the increased deficit in half by the end of his first term... Anybody out there doubt a politician's promise?? Nah... Hmmmm, when does his first term end? January 2013.
Now the Chinese could certainly pull a U.S. and print Yuan - creating worthless money in exchange for worthless bonds... But would they? I would have to say "NO". In fact, it is quite possible that the decline in the Long Bond and the rise in Oil is arising from a strategic move on China's part - but let's not go there just yet (that's for a future post)... No, the Chinese, unlike the U.S., think DECADES ahead (remember Unocal? China was Peak Oil Aware long before Americans ever heard of the term). Wanna bet they are thinking out past Obama's first term? And from a militaristic point of view, China could win a "war" with the U.S. without firing a shot - by letting the US$ fall on its face or by forcing interest rates into the double digits (China's leaders and military have no doubt read "The Art of War... To Win Without Fighting"). No, I am in agreement with the M.S. - China is not going to destroy its currency in order to save its US$ investments. Not even to save its U.S. export market - they would be far better served to take the hit now, and use the Yuan they would have destroyed to save the US$ to increase exports elsewhere AND TO INCREASE DOMESTIC DEMAND.
Japan may or may not be willing to go down with the ship/US$. China? NAFC (nor Russia).
Mentatt (at) yahoo
19 comments:
If world trade breaks down, which is what you are describing, it could benefit the US because while there is a global overcapacity in manufacturing we have offshore most of ours in a mad rush for short term profits.
Japan has no choice but to talk up the dollar. Their economy is wedded to the U.S.; they import all their energy and export manufctured goods using it. With higher oil prices and no U.S. exports they are toast.
To Dan; world trade has been about lending the U.S. money and then making stuff the U.S. can buy with the money you've just lent them!
With that novel 'system' now collapsed, the U.S. has to go back to more meaningful economics; you either become self-sufficient in everything and stop importing oil and manufactured good (Import Replacement, but that doesn't settle your debts), or you build a new exporting economy and use the profits to settle your debts to the world and then you can start importing again. But it's a LONG way from 'here' to 'there'!
The other solution is to collapse the dollar to write off most of the international debts, and then the U.S. will have no choice but to become self-sufficient because it won't be able to borrow and it won't be able to buy ANYTHING!
Donal:
I think your final point most likely. Either collapse the US$ OR just default outright. Either way, from that point on the U.S. will have to fund itself - no one is going to lend it money.
The thing I was trying to bring to the discussion is WILL China destroy its currency to preserve its U.S. export market? While I do not think so, I am interested in having some other minds wrap themselves around this issue.
G:
I am at war with myself. On one hand, I have to take them at their word that QE is dead. On the other hand, I don't see federal outlays being reduced. Now what? How does that get resolved? The reflation trade could get pole axed here. Either way, equities are in trouble if QE is gone. If federal outlays do not come in to match revenues within $400-500 billion, then all rates skyrocket to absorb the supply. Crushing the economy. Or, if that stimulus is not put into the system, aggregate demand is going to collapse and GDP with it. If QE is off the table, then whole shebang is going to crater. To a man the risk is highest in equities. And metal and oil.
You know where I stand on oil and metal. But something wicked may come our way. Your thoughts.
Greg; the short answer is no, I don't think so. The only reason China would devalue to keep alongside the dollar is to protect their continuing trade with the U.S., but that just isn't going to happen- there is no onward trade.
I'd guess China is waiting to see whether the U.S.'s forward-borrowing is enough to keep the ship afloat. The moment they think it's not, they'll take the long view and abandon the dollar and write off their remaining losses.
In the meanwhile they'll spend dollars in the rest of the world; buying Australian and African metals suppliers (apparently they now own 93% or the rare metal production), African land for food production (like in Madagascar) and anything else where the asset is going to be worth more than tanking dollars.
American trade was just a stepping stone; China can go on from here without it.
By the way, Japan has every reason to be very worried, and not just about it's balance of payments. China still hates Japan for atrocities committed during the Japanese invasion.
The question is; will it be satisfied to just buy the bankrupt Japanese companies, or will it take Japan by force?
And no, I'm not joking!
We view everything as Apocalypse and big crashes rather than long boring wimpering declines.
Traditionally the Chinese do death by a thousand cuts and let the victim slowly bleed out.
They would have solved the aggravation in North Korea a long time ago if they were into big gestures.
They tried it in VietNam shortly after our ass whipping there and decided it wasn't worth it.
They do play the long game but they do not dream planetary imperial dreams like the corporate jocks of America and the UK.
They will keep the junkie on life support enough to have a long slow boring lingering death.
And if you're worried about importing oil when the money's no good, then really worry about ammonia. 70% is imported. It is fertilizer.
Regards,
Coal Guy
Dan,
This idea that sending manufacturing offshore is some kind of corporate greed thing, it isn't. It is survival. Under current regulatory and trade conditions there are only two choices for many industries in the US. Move off shore. Quit business. Period.
Not to say that there aren't evil and unscrupulous guys in business. They seem to be pretty evenly distributed everywhere. Business gets its share. But, this beat business 'til it bleeds, then call it evil when it dies crap has got to stop.
Regards,
Coal Guy
What China WILL do is sieze all US assets on their soil.
regards,
Coal Guy
Jiang Kai Shek pursued inflationary policies, so the PRC Yuan was originally backed by commodities. Ho Chi Minh was printing money like crazy in the 1950's and the Chinese put a stop to it. So the Chinese have in historical memory the turmoil that inflation causes.
Lenny:
As always, to the point. Hope all is well.
Coal guy:
70% ammonia is imported? Could refineries be recast to produce amMonia?
To Anon:
I do not think in terms of crashes - most things take longer then most would expect. This might be different.
From what I've read, and it's not too much, ammonia production in the US is a victim of high natural gas prices here. It has been declining for a long time. It is produced form natural gas by extracting the hydrogen from the NG and combining it with nitrogen from the atmosphere. It is the cheap source of hydrogen that has been lacking.
I don't know about recasting oil refineries for the purpose. Any energy source that can strip hydrogen from NG or water will do.
I started to look at this when I met someone involved in research of ammonia as a transport fuel. It burns more efficiently and the exhaust is all water and nitrogen. No CO2. However, the supply is limited. Can be made using wind, solar or nuclear power to separate hydrogen from water.
Most research is going on in the Midwest. They are looking at efforts to erect windmills to generate electricity to drive the process. Upper mid west has wind, but no power lines to transport the electricity away. But just the place where most ammonia is used.
Google ammonia "transport fuel"
Regards,
Coal Guy
It would be an enormous if not impossible task for the US to return to an economy based on manufacturing when they are importing 70-80% of their oil supplies.
Also, better data:
In 2006, 42% of ammonia was imported according to the USDA. Better that the 70% I saw elsewhere.
Regards,
Coal Guy
Our net imports are about 9.4Million barrels per day. That's just a bit over 50% of demand. Second, most of this is used as transport fuel.
Apparantly, the first thing we need to manufacture is transport fuel, so that everything else can be delivered.
Regards,
Coal Guy
Coal Guy:
I have thought the offshoring frenzy was bad for years because it was obviously going to end very badly. It may have been suicidal for an individual company to do it but we have a government for a reason.
Coal Guy:
I have thought the offshoring frenzy was bad for years because it was obviously going to end very badly. It may have been suicidal for an individual company to do it but we have a government for a reason.
The Oil Futures market is usually just that, a trading arena for finance. Indeed the purchaser of oil futures never intends to take delivery of actual oil.
But just suppose you have a massive amount of dollars that you fear the US is months away from turning into horse fodder?
We already know that the Chinese are buying everything from metals to farming land. Could it be that they are buying massively into oil futures, not to trade but to actually take delivery?
Even at $90 per barrel, they will know that they have a supply of oil in Dec 2015, instead of container loads of inflation trashed dollars? And in 2015 $90 oil may be a bargain.
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