Tuesday, February 24, 2015

Fundamentally Flawed - Chapter 6, Debt Ceiling Fiasco...July, 2011 & China Opts Out


by Chris Hamilton, February 2015
Why July of ’11?  July was the debt ceiling debate and ultimate fiasco where the US decided to “keep on keeping on”.  Democrats and Republicans determined to tax less and spend more…and both sides were pleased by this anti-compromise.  On July 29th both sides caved and we have never seriously debated this topic since.  But what happened in D.C. was clearly noted in Beijing.  The largest foreign Treasury owners since the turn of the century are highlighted in the below chart.  Note China’s Treasury buying ramp until July of ’11 and the marked change since.  Also note the incredible rise in Treasury ownership purchased and held in Belgium, Luxembourg, Ireland, and Cayman Islands since July of ‘11!!!  One look at the chart below shows China hit its all-time peak of US Treasury holdings in July of ’11…and despite running record trade surplus’ with the US since, China has been a net seller of US Treasury debt to the tune of -$71 billion.  But lucky for America; since June of '11 Japan (while running record trade and budget deficits) has purchased $346 billion and Belgium/ Luxembourg/ Ireland / Cayman Islands (yes, seriously...where is Peter Sellers and the Mouse that Roared when you need him!?!) have combined purchased $697 billion in US Treasury’s since July '11 nearly matching the Federal Reserve's QE!?!  China’s hard stop on net buying and subsequent selling was mirrored by a reinvigorated Japanese bid and an equally hard start of purchasing in particularly Belgium but also Luxembourg, Ireland, and Cayman Islands (below).
Source, US Treasury, TIC Report
A quick look at the Treasury markets largest buyers since July ’11 (the debt ceiling debacle) ‘til now in the below chart.
Source, US Treasury, TIC Report

The below chart highlights the total change in Treasury ownership since July ’11 including the Federal Reserve (but not including another $660 B of short term debt sold by the Fed and the proceeds were used to purchase the like amount of mid and long term Treasury bonds in Operation Twist).  Belgium, Luxembourg, Ireland, and Cayman Islands nearly purchase as much as the Federal Reserve from July '11 to Dec '14.  One truly wonders what clients would want record low yielding bonds in this massive offshore buying...and why no similar bid exists within the US?

Source, US Treasury, TIC Report

However, the chart below shows who along with China has not been purchasing US Treasury’s since June of ’11.
Source, US Treasury, TIC Report
One last look at the location of nearly all Treasury purchases since June 2011.
Source, US Treasury, TIC Report

It’s one thing to make a claim one believes the Federal Reserve and/or its agents or designees at its direction are buying some portion of the Treasury debt overseas alongside its acknowledged QE programs in the US.  It’s another to show means (Federal Reserve has unlimited ability to swap currency at its discretion, the motive (low and lower rates on record amounts of debt and the need to continue creating debt), and the opportunity (revisit the TIC report that it states it doesn’t know who buys this stuff or where the money ultimately comes from)…To wit, “The data are collected primarily from US based custodians.  Since U.S. securities held in overseas custody accounts may not be attributed to the actual owners, the data may not provide a precise accounting of individual country ownership of Treasury securities see TIC FAQ #7 at:  http://www.treasury.gov/resource-center/data-chart-center/tic/Pages/ticfaq1.aspx).