China Turns it Up Another Notch
Here it comes, slowly but surely: “We sincerely hope the U.S. fiscal deficit will be reduced, year after year,” China’s Assistant Finance Minister Zhu Guangyao said overnight after talks with Treasury Secretary Geithner. Could he lay it out any more clearly than this? “The Chinese government is a responsible government, and first and foremost our responsibility is the Chinese people, so of course we are concerned about the security of the Chinese assets.”
The Chinese now own over $801 billion in U.S. debt, nearly double their holdings at the start of 2007 and by far the world’s largest stash of American paper.
“We are committed,” responded Tim Geithner, “to taking measures to maintaining greater personal saving and to reducing the federal deficit to a sustainable level by 2013.” We have no idea what he might mean by that… the CBO still projects a $1.8 trillion budget deficit this year, $1.4 trillion next year, $984 billion in 2011 and $633 billion by the end of 2012. That makes the Bush administration look like penny pinchers, and is certainly not even in the realm of “sustainable.”
The U.S. government issued another $42 billion in 2-year notes today, the first of this week’s record $115 billion debt issuance.
“Debt is the story of today’s economy,” says Chris Mayer, echoing a theme of this year’s Investment Symposium. “There is still too much of it. Yet the mainstream view seems to be that more of same is the elixir to see us out of this bust. In fact, debt issuances by governments are hitting new records.
“The U.S. government is spending money hand over fist. That’s not new. The U.S. is hoping more foolish foreign central banks will line up and absorb the deluge for pitiful interest rates. The 2-year note sells for a yield of 1.1%.
“Maybe Washington will pull it off. But one day, people are going to demand a better rate to take the government’s paper. At some point, the market’s appetite for puny yields will go away. When that happens, interest rates will rise significantly and debt prices will crash. It’s not a matter of if, only when. To continue at this pace is clearly unsustainable.
“The crazy thing is that the U.S. government is not alone. Emerging markets are also issuing record levels of bonds. The Financial Times reports this morning that ‘the surge in issuance this year [hit] its highest point since records began in 1962.’ The biggest issuers include China, Brazil, Russia, South Korea and some of the Gulf states.
“Incredibly, most seem to look at these debt issuances as positives for the global economy. The FT, for instance, opined (in the middle of its news story) that the debt sales were ‘an encouraging sign for the world economy.’
“It’s a weird paradigm that thinks growing debt levels are a good thing for the global economy, but it is a mainstream view. Economists, lost in their models and abstract curves, preach the benefits of stimulus — printing money and spending and borrowing. And people seem to eat this up.”