US Treasury Debt: No Interest In Sight

by Bill Bonner.

The big news yesterday was that China was dumping its US Treasury debt. Behind this story is another story. And, of course, there’s another one behind it. And about a million in front. But let’s begin in the beginning:

WASHINGTON (AP) – The government said Tuesday that foreign demand for US Treasury securities fell by the largest amount on record in December with China reducing its holdings by $34.2 billion.

The reductions in holdings, if they continue, could force the government to make higher interest payments at a time that it is running record federal deficits.

The Treasury Department reported that foreign holdings of US Treasury securities fell by $53 billion in December, surpassing the previous record of a $44.5 billion drop in April 2009.

The big drop in China’s holdings meant that it lost the top spot in terms of foreign ownership of US Treasuries, dropping to second place behind Japan.

Japan also reduced its holdings of US Treasuries, cutting them by $11.5 billion to $768.8 billion in December, but that amount was still more than China’s December total of $755.4 billion.

The $53 billion decline in holdings of Treasury securities came primarily from a drop in official government holdings, which fell by $52.3 billion. The holdings of foreign private investors fell by $700 million during the month of December.

For all of 2009, foreign holdings of US Treasuries dipped by $500 million. In 2008, foreigners had increased their holdings of US Treasuries by $456 billion as a global financial crisis triggered a flight to the safety of US government debt.

Let’s see, China is cutting back on US debt purchases. So is Japan. And so are the big bond funds, such as PIMCO, the biggest in the world. Who will buy US bonds? Where will the US get the money it needs to squander on wars for the young and pills for the old?

Chris Hunter, who runs the research department at our family office, says the number of potential buyers is getting dangerously low…to the point where an auction of Treasury debt could fail for lack of interest.

What this seems to mean…on the surface…is that treasury yields will rise. Less demand. More supply. Prices fall. Yields rise. In fact, that is what seemed to be underway yesterday. Prices on 30-year Treasury debt fell.

If yields rise significantly you can say goodbye to any hope of a recovery. Rising yields make it harder for investors and businesses to make money. New projects will be cancelled; new workers will be fired even before they are hired, and investors will move their money out of investments that are ‘risky.’

Especially hard hit will be Japan.

Yesterday, in London, we caught up with Dylan Grice of Societe Generale. Dylan does economic research for the firm and recently authored a report suggesting that Japan will slip suddenly into inflation…and then hyperinflation.

Yesterday also brought news that the feds’ stimulus program has been a big success. Barack Obama says so. The New York Times, via columnist David Leonhardt, says so. So does The Financial Times’ lead economist, Martin Wolf.

‘Hic hoc, ergo propter hoc…’ or something like that. Here at The Daily Reckoning, we commanded the sun to rise this morning. The sun did rise. So, we must be able to tell the sun what to do, right?

The feds spent a lot of money. The world didn’t end. So, the feds – and their cheerleaders in the press – say they saved the world.

But did they?

No.

As to the actual state of the economy, the evidence is mixed and confusing. Yesterday, for example, stocks rose another 40 points on the Dow…but volume is low and another big drop could begin any day.

The NAHB announced that its index rose in February – but it was still the 6th worst reading for the housing index in the last 25 years. Meanwhile, mortgage applications are down. But housing starts are up.

Manufacturing is improving. Corporate profits are way up. But people don’t have jobs…and there is not much hope of finding them any time soon.

Besides, the world wasn’t coming to an end in 2008. All that was happening was that people who had made mistakes were getting what they had coming. Instead, the feds stepped in to save them…by ‘socializing’ their errors. Now, we’ll all pay for their errors. And pay much more. Not only are the private debts still there – more or less – now, we have trillions more in public debts to pay too.

Way to go, feds…

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010. 

  • http://www.gravatar.com/avatar/ccfb18c362797dc754517d91f08498b7.png Harry

    Is anyone really stupid enough to believe that we will pay down the debt we’ve incurred on a personal or national basis?

    BDI at 57% of where it was in Nov. ’09, 23% of where it was in May ’08. Unless we have recently started making a lot of durble goods here in AMerica (we haven’t) the economy must not be improving (it isn’t). There’s no economic value in us delivering pizzas to each other. Or providing usurous loans to the pizzerias and leeching off securities made from loans we know to be bad….

    FOMC met today to start withdrawing $2T from the US economy. That’s why TWO Fed Heads warned about tax increases and/or hyperinflation yesterday.

    Money out, zombie houses in.

    Housing starts up? Who cares if no one is buying them? Why start if people are being kicked out of existing ones? Any jackass can start a house. Only Moses could sell them to people with no money and U6 unemployment at 16%+. Unemployment/ underemployment at 16% in the most heavily armed country (counting public OR private weapons) in the history of earth…

    Speaking of unemployment, it’s not climbing as fast. Which is to say that the bleeding has stopped on a corpse. It’s true. But not necessearily good.

    “Father of the Euro” says Italy is more dangerous than Greece (which is still destroying the EMU) and Italy is un-bailout-able.

    JP Morgan’s Athens office bombed. Good. The financiers know what is in store for them now. The money-changers have wrecked the police pensions and public finances that pay their salaries. Look for more financial attacks, and for the police to begin to look the other way if not actually participating.

    Nothing here can be refuted. Only madmen with their own interests in mind will harangue the heavens in disagreement. And then they’ll get murdered by the people who are pissed off because they’ve been pissed on…

    P.S. I seriously doubt anyone who’s really making CNBC money would sit around waiting to financially masturbate in the comments of a blog everyday so I think you’re cover is blown (no pun intended) right there. I think you may indeed be Bonner himself as others have suggested. After all you’d have to versed in the realities of finance, then just say the opposite no matter how stupid.

    P.P.S. I proved my point and wasted enough of my time jerking your chain, jackass. Whomever you are, you may have your pathetic soapbox back.

  • http://www.gravatar.com/avatar/ccfb18c362797dc754517d91f08498b7.png Harry

    Jobless claims, inflation jump.

    Somehow this is good. I guess those unemployed people can buy all the new housing starts at whimsically high prices…

  • http://www.gravatar.com/avatar/ccfb18c362797dc754517d91f08498b7.png Harry

    Real cost to rescue Greece: $441 Billion.

    Debt doesn’t matter, since I am Harry.

    I wonder if it ever occurs to traders (traitors?) such as my self that the governments of the world will stick it to us by refusing to honor the bonds/bills/toilet paper they’ve sold us.

    But no on can fool us, we’re Wall Street. Two-hundred solid years of robust, arrow-straight growth.

  • http://www.gravatar.com/avatar/ccfb18c362797dc754517d91f08498b7.png Harry

    Is anyone really stupid enough to believe that we will pay down the debt we’ve incurred on a personal or national basis?

    BDI at 57% of where it was in Nov. ’09, 23% of where it was in May ’08. Unless we have recently started making a lot of durble goods here in AMerica (we haven’t) the economy must not be improving (it isn’t). There’s no economic value in us delivering pizzas to each other. Or providing usurous loans to the pizzerias and leeching off securities made from loans we know to be bad….

    FOMC met today to start withdrawing $2T from the US economy. That’s why TWO Fed Heads warned about tax increases and/or hyperinflation yesterday.

    Money out, zombie houses in.

  • http://www.gravatar.com/avatar/ccfb18c362797dc754517d91f08498b7.png Harry

    Housing starts up? Who cares if no one is buying them? Why start if people are being kicked out of existing ones? Any jackass can start a house. Only Moses could sell them to people with no money and U6 unemployment at 16%+. Unemployment/ underemployment at 16% in the most heavily armed country (counting public OR private weapons) in the history of earth…

    Speaking of unemployment, it’s not climbing as fast. Which is to say that the bleeding has stopped on a corpse. It’s true. But not necessearily good.

    “Father of the Euro” says Italy is more dangerous than Greece (which is still destroying the EMU) and Italy is un-bailout-able.

    JP Morgan’s Athens office bombed. Good. The financiers know what is in store for them now. The money-changers have wrecked the police pensions and public finances that pay their salaries. Look for more violence against banksters and for the police to begin to look the other way if not actually participating.

    Nothing here can be refuted. Only madmen with their own interests in mind will harangue the heavens in disagreement. And then they’ll get axeded by the people who are p1ssed off because they’ve been p1ssed on…

  • http://www.gravatar.com/avatar/ccfb18c362797dc754517d91f08498b7.png Harry

    P.S. I seriously doubt anyone who’s really making CNBC money would sit around waiting to financially masturbate in the comments of a blog everyday so I think you’re cover is blown (no pun intended) right there. I think you may indeed be Bonner himself as others have suggested. After all you’d have to versed in the realities of finance, then just say the opposite no matter how stupid.

    P.P.S. I proved my point and wasted enough of my time jerking your chain, jackass. Whomever you are, you may have your pathetic soapbox back.

  • http://www.gravatar.com/avatar/ccfb18c362797dc754517d91f08498b7.png Harry

    P.S. I seriously doubt anyone who’s really making CNBC money would sit around waiting to financially m@stvrb@te in the comments of a blog everyday so I think you’re cover is blown (no pun intended) right there. I think you may indeed be Bonner himself as others have suggested. After all you’d have to versed in the realities of finance, then just say the opposite no matter how stupid.

    P.P.S. I proved my point and wasted enough of my time jerking your chain. Whomever you are, you may have your pathetic soapbox back.

    The market will do more damage to you than I can. Or at least than I would bother to do.

  • phelps who cant swim

    Saving the world a trillion dollars of new debt at a time. This makes as much sense as we have to go war to promote peace. Why do we suffer such fools?

  • Harry

    Wow! Another great day! If only you’d listen. Stocks are the place to be. Period. Let’s see:

    -flight to safety = equities
    -any hint of inflation = equities

    Can’t lose kids. Been trying to tell you that for some time but you just don’t listen.

  • http://www.gravatar.com/avatar/ccfb18c362797dc754517d91f08498b7.png Harry

    Yeah flight to safety! Kiddzzz! Just like the flight to safety in fall ’08 when the stock market went up from 14,000 to 6,500!!!

    Who cares about inflation? Even if it is 86.1% annualized at the crude goods level.

    Do the math. GSers are going to be imprisoned for the Greece debt curtain or banned from the EMU. And the stock market at 34,500 does you no good if a glass of beer costs $476.

    Been trying to tell you that kiddiezzzsz but you just won’t listen.

    1935 wasn’t THAT bad of a year was it?!

  • 401-911

    Wow! Harry (the latter) you’re really smart. I bet you know just when to get out of the market too. Promise you’ll let us all know. Take your time though cause I’m selling while the markets are rising and will be out before I hear from you. And hopefully before Zero attempts to nationalize everyone’s IRAs to prop up the treasury bond market.

  • jason

    Things are picking up: commodities are going up with the manufacturing.

  • doug

    Lets see there is a 3 year supply of housing and Harry is excited about housing starts . It seems to me that housing starts should be zero for quite a while instead of adding to an already bloated inventory. But those are just silly facts don’t let them get in the way of your fantasies. I would post the link show this but then they would delete my comment

  • Vlad

    Greetings Bill,

    So I am curious about how inflation/hyperinflation will impact your Long side of the Trade of the Decade: Japan. If inflation in Japan gets out of control, it would quickly devalue its currency relative to the US Dollar.

    In a likely scenario, if the Japan stock market does not increase in at least lock-step with inflation, US investors in Japan will lose money in dollar terms.

    Am I missing something?

    Thanks,
    Vlad

  • Dan

    It’s obvious NOW is the time to pay whatever Doug Casey is charging for those properties he has developed in La Cafayte in Argentina. Ugh !

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