TIC Report Debunks Fears of Treasury Dumping

August 19, 2009

 

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.