TIC Report Debunks Fears of Treasury Dumping

 

http://www.treas.gov/tic/mfh.txt

The above link will take you to the Department of Treasury’s June report of major foreign holders of treasury securities.  I haven’t posted about this report before, but there’s something of interest in this one. 

One of the major consequences of our huge trade imbalance, especially with China, is that we have become dependent on them buying our treasuries – in effect loaning us the money to support the trade deficit.  Free trade advocates now warn that if we were to resort to protectionist measures to restore a balance of trade, China could retaliate by dumping their treasury holdings.  They claim that this would cause the Treasury Department to dramatically raise interest rates to attract other buyers – the result being economy-killing high interest rates in the general economy. 

I’ve suspected that this is a bogus argument.  Any change in trade policy that would tend to restore a balance of trade would send the dollar soaring, making U.S. treasuries such attractive investments that other buyers would eagerly step in if one or more countries, upset with the effect on their trade position, decide to retaliate by dumping their treasury holdings. 

In the month of June, that’s exactly what happened.  As you can see, China, who has been threatening to begin reducing its treasury holdings, did exactly that, reducing their holdings by $25 billion, from $801 billion in May to $776 billion in June – a big change for one month.  Yet, Japan stepped in to snap them up.  The net result is that interest rates have actually been falling, not rising, as China reduces its holdings of U.S. treasuries.

It all makes sense.  An economy that has balanced trade is stronger than an economy with a huge trade deficit.  A strong economy is a more attractive place for investment than a weak economy.  While the threat of dumping U.S. treasury holdings in retaliation for any moves toward protectionist trade policy may be real, the interest rate consequences are purely imaginary.  It doesn’t matter a bit if one or more nations wants to reduce their exposure to treasuries when other nations are even more eager to buy.  I think we can safely say that this scare-mongering tactic by free trade shills has been disproven.

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6 Responses to TIC Report Debunks Fears of Treasury Dumping

  1. ClydeB says:

    China is in one of those “between a rock and a hard place” situations. To sell the goods, they must buy the debt. To redeem the debt, they must take dollars. What are they to do with the dollars? They have purchased some real estate, but for the most part, they are stuck. Japanese yen is a reasonable trade off, but dollars still work best in the global market. Their oil purchases are made with dollars, for instance.
    Who knows what will happen when the dollar collapses as it is certain to do if we don’t make some drastic changes in our trade policies and in our domestic spending. The tremendous growth in the defecit combined with the sharply reduced tax revenue are taking a terrible toll on the future value of the dollar, in my opinion.

  2. mtnmike says:

    Pete,

    I wish that I could agree with your consensus. A strong dollar? I don’t believe that is possible.

    I have written several in-depth articles regarding the permanent demise of Japan. It is my opinion that Japan will NEVER recover. Attempting to appease the U.S. by loaning us money in exchange for a pass on their trade imbalance is not a matter of choice but a last desperate resort. Japan is broke and their demographics nearly assure that they will remain in that state.

    Trading one trade imbalanced lender for another is not a solution, but rather an impressive show of the desperation that demonstrates the severity of the situation. The low interest rate does not suggest a strong nation, but rather the tenuous balancing act of the world’s largest house of cards.

    The U.S. is the largest debtor nation on earth, left without our manufacturing base and dependent on foreign energy and massive monetary support. In my opinion, that does not suggest a strong dollar any time soon.

    • Pete Murphy says:

      You’re right that a strong dollar isn’t possible in the environment of our current economic policies. But if we restored a balance of trade – which includes reducing our population to eliminate our dependence on foreign oil – I believe the dollar would go through the roof.

      But, you’re right, as long as we choose to remain the biggest debtor nation on earth (and it is a choice, for we could easily correct it), we will never have a strong dollar.

  3. cj says:

    I guess your WRONG!!!!!

    China Has Begun Dumping Their U.S. Treasuries

    http://www.dailypaul.com/node/104275

    • Pete Murphy says:

      Geez, cj, could you have made it any more obvious that you didn’t even read the post? Of course China is dumping their treasuries! That was the whole point of the post! That they’ve begun doing it, but with no effect on interest rates. You need to read and think before you react.

  4. Randy says:

    “… [Japans] demographics nearly assure that they will remain in that state”

    mtnmike, Japan’s demographics is actually a positive. Since they are strong savers (unlike the soon-to-be broke USA oldtimers), the elderly can afford the latest biotech innovation. And since biotech is really the only industry left (alternative energy? like what is there?) that can attract bucks through innovation, they at least have a reason to be optimistic. As far as being broke, who the heck isn’t?

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