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January 27, 2010
Good Morning:
U.S. Debt Purchases
An article titled 'Debt Burden Now Rests More on U.S. Shoulders'
says the U.S. Federal Government borrowed more money in 2009 than it previously
ever had done, and that China, the largest purchaser of that debt sharply reduced
its purchases (to the end of November) to less than 5% of those borrowings.
The article says China, the largest holder of U.S. Treasury Securities, raised its
holdings $790 billion to November 2009, with Japan and Britain the second and third
largest holders - holding $757 billion and $278 billion respectively. Interestingly,
the article reports:
· China's holdings at the end of November were lower than they
were at the end of July, and that such a decline in China's U.S. Treasuries holdings
has not happened over a six-month period since 2001;
· in 2009 the volume of outstanding Treasury securities owned
by non-U.S. Government agencies rose by $1.4 trillion, a 23 percent gain, to $7.8
trillion - in dollar terms the largest annual increase ever, but as a % increase
slightly behind 2008;
· in 2008 and 2007 China respectively purchased 20.2% and 47.4%
of the Treasuries offered by the U.S. Government;
It strikes me two things worth thinking about in the context of one's equity investments
arise out of this:
· first, some economists and commentators fear what could happen
if China (or I assume Japan, or both) at some point decide to sell off the U.S.
Treasuries it (or they) own. While I may be wrong in my assessment, personally
I don't see a lot of risk of this happening as the consequences largely would be
outside China's (and Japan's) control, and I think that would be disastrous to the
U.S.$ where it currently is the world's Reserve Currency in a 'fiat currency' environment.
I continue to think that rather than unload its U.S. Treasuries in an unfortuitous
manner, that China will continue to actively acquire 'cherry-picked' strategic investments
(largely resource related) using its U.S.$ holdings as 'acquisition currency'.
I suspect that in the near-term going forward China will only purchase whatever
portion of 'new U.S. Treasury Issues' it thinks it needs to keep the U.S.$ on a
reasonable stable keel;
· second, that U.S. non-government investors will be looked to
to 'pick up the slack' in new U.S. Treasury issues going forward. Exactly
whether and how they will be able to do this in the current (and what I see as prospective)
U.S. economic environment remains to be seen. I can't see who will 'step up
to that plate' but if U.S. private capital doesn't do that, I see little good for
the U.S.$ going forward. I am of this opinion as I don't see U.S. government
annual deficits dropping anytime soon. I think this has to put China on an
'ever faster' strategic acquisition treadmill.
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