US Treasury Debt: No Interest In Sight

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…