Foreigners Slow U.S. Treasury Purchases
This could be trouble because the Chinese are the largest foreign supporter of the U.S. debt (via MarketOracle)…
Let’s look at some Chinese macroeconomics. The Chinese economy is also in decline. We have seen GDP growth decline to approximately half of what it once was. Just like the U.S. , economic declines have lead to reduced levels of domestic tax revenues. Given that the global economy will continue to decline, we can expect Chinese tax revenues to continue to decline, and we can also expect the Chinese domestic fiscal expenditures to increase in order to combat this (even the Chinese are Keynesians). Look for more along the lines of their $600 billion stimulus package. Less revenues and higher expenditures means less government surplus. That will result in less of a budget surplus, which means less money to spend on Treasuries.
You are obviously aware of the decline in consumer spending here in the U.S. That means people are buying a whole lot less things that say “Made in China .†This has a two pronged effect. The first is simply less business for China ‘s manufacturing sector. This contributes to the above mentioned scenario and will end up further reducing China ‘s budget surplus.
The second notion is very simply. Less spending here in the U.S. means less of a trade surplus for China . That’s exactly what we’re seeing as the trade gap between the U.S. and China is in decline. As the trade gap shrinks the amount of excess U.S. dollars that are funneled back into the Treasury market decreases. Expect this trend to not only continue, but to get more severe going forward.
…it will be interesting to see just how long Congress resists grabbing 401k’s or jacking up taxes to infinity and beyond.
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