Maybe you can get one directly from a Chinese Bank?
Original Image Source It is my belief that as a non-profit educational use, the use of this image constitutes ‘fair use’. The China Merchants Bank can be reached here if you would like to apply directly and bypass The Fed…
Well, for the second straight month China has reduced the credit limit for the USA on the Chinese Credit Card. From The Wall Street Journal:
By TOM BARKLEY And MEENA THIRUVENGADAM
WASHINGTON—China was a net seller of U.S. Treasurys for a second straight month in June, while overall inflows into long-term U.S. assets continued, the Treasury Department said Monday.
China’s holdings fell $24 billion to $843.7 billion, though it remained the largest foreign holder of Treasurys. That followed net sales of $32.5 billion in May.
The rest of the article is worth a read as it tells where the treasuries are going.
OK, so what have we got? China is a net seller of Treasuries. They are reducing the credit limit on the Chinese Credit Card. The wealthy folks of the world are buying more and so is Japan (in an attempt to keep the Yen from rising too much). In related news, China is now the number 2 economy in the world. Passing Japan and gaining on the USA.
What’s going on here is that the Chinese know their currency has to appreciate and don’t want the dollar exposure when that happens. While Japan wants to try to stop the appreciation of their currency by selling a load of it for Treasuries. (This works short term, but longer term the relative economic health dominates). For a while, this will be a ‘net nothing’. Then The Fed will need to raise interest rates at some point and the private demand for Treasury Bonds will turn into selling. When? That depends on when we start an economic recovery.
This means there is a very large inflationary risk being built into the dollar. We’ve got The Fed saying they will buy in $Trillion of bonds as the real estate portfolio runs out (as mortgages are paid off) and China now clearly dumping treasuries at about $250 – $333 Billion a year (given the two months run rates). So about 3 years they could be out of treasuries. (If following my ‘shorten the maturity’ strategy it could be done in 2 with reduced net sales but rotation into shorter maturities that then simply mature without replacement). The real estate portfolio will not run out that fast… nor is Japan going to be able to buy that fast for that long.
The bind begins.
I give it about a year for inflation to start kicking up. Measure it off of employment rates. When we’ve got unemployment down around 6% to 7% and The Fed starting to tighten rates, that’s the likely ‘lift off’ point. Between now and then we’re going to be trying to dig out of a recession with prices under some pressure. Before that time I’d expect to see resource price inflation as China starts buying more things like copper and coal. But…
To whom will they sell?
The American Consumer has been hitting the home equity ATM for the last decade or two to make ends meet. That’s now shut down. The personal credit cards are full. The job is not giving a raise (IF they have one…). And now the Chinese Credit Card is full too. Japan can’t currency manipulate to wealth against that tide and The Fed is already over a $Trillion of balance sheet and just trying to run off the mortgages (from that home equity ATM…) without causing a disaster (via soaking up the money into treasuries) and will not be interested in printing ANOTHER $Trillion just to keep the American Consumer loaded with debt to spend.
So we’re stuck with the hope that the Rest Of World will pick up the consumption. Can it? In the ROW we have Brazil doing well, and Chile, a little high end indulgence in the OPEC / Oil states, but they mostly just sink the money into buying assets world wide, not Chinese Trinkets. Japan is moving toward retirement and wants to sell it’s own electronics and goodies. And a large or growing domestic demand inside China has yet to show an impact. (And I doubt they would want many “happy meal toys” et.al.)
So I’m left with the uneasy feeling that this does not have a good ending.
No, I can’t point at any particular “why”.
I just can’t see where the “engine of growth” comes from. The USA is on a government driven consumption binge (now focused on medical care and wealth redistribution / destruction) and the US Consumer is tapped out and facing a Demographic Bomb as the Baby Boomers retire so the new crop of workers will not have a lot of cash left over after paying medical care for everyone else.
Europe is trying to just hold everything together and get the PIGS cleaned up. (Portugal, Italy / Ireland, Greece, Spain) and I can’t see them developing a sudden love of Chinese Mercantilism.
It just looks like things are headed for a deadlock.
The optimist in me wants to embrace a scenario where the USA starts to grow again and jobs pick up with spending to follow and a virtuous circle of prosperity. But I know that I’d not start a business in the present conditions and if I did have one, I’d be looking at what staff to let go to pay new taxes on the remainder; not looking to add more to the burden on my back. So I’m quietly hopeful, but for no reason at all, and that makes it a fearful hope.
I hope I’m wrong.
But hope is not a strategy.