Aside from American financial institutions and the Fed (the buyer of last resort), the largest buyers of US Treasuries and notes are all Asian countries. You can probably guess which ones.
#1 – China
.
China, more than anyone, is probably most concerned with the value of the US dollar and the stability of their US dollar investments. As much as they might like to do so, Americans are in no position to scoff (over trade criticisms, for example) at the proverbial hand that is literally feeding them (recall that the U.S. is actually bankrupt). Barry Allen of Marret Asset Management says that China knows it can’t sell all of its US dollars at this point, so instead it is choosing to buy as little USD as possible and also hedge against the USD by using its reserves to buy up commodities.
How To Hedge Against the US Dollar
#2 – Japan
.
Japan is already at 200% debt-to-GDP, so you might argue there is little left to protect in their economy. Although Japan is still the #2 largest buyer of US debt, they are, economically speaking, perhaps the least important at the moment for the above reason.
#3, 4 – Korea and Taiwan
.
We don’t see as much press on Korea and Taiwan, but these are also recently booming economies. Much of this, of course, is also due to their rise as trading partners with China, so they benefit from China’s growth. Just look at what’s happening with VietNam now.
Morgan Stanley has projected a 40% increase in the supply of new Treasuries in 2010, which works out to a round of about 2.6 trillion dollars of fresh debt on the books. You thought 2009 was bad for stimulus? These numbers are year-over-year projections, which means that there will 40% more debt created in 2010 than was created in 2009.
Weekly Auctions of U.S. Treasuries to Increase
Barry Allen suspects that the U.S. is going to hit its “debt wall” not in 2010, but in 2011 and 2012 (or around 120% of debt-to-GDP). In the short term, there are still too many countries – developing economies – that have strong incentives to keep buying US debt in order to help support their own growing economies and protect their own positions.
After some time, though – perhaps as these economies take off, or more bi-lateral, ex-U.S. trade develops – Allen sees the likelihood that the only real buyer of significance left of US Treasuries will be the Fed itself. He sees this happening within the next 2-4 years.
If such a scenario should happen, Allen forecasts that the world will see a recession at least as severe, and lasting much longer, than the one seen in 2008-2009.
Zhou Xiaochuan’s Proposal For World Reserve Currency is Accepted by UN (March 29, 2009)
U.S. Dollar Up For Debate At G8 Meeting (July 5, 2009)
Supracurrency Coin Proposed As New World Reserve Currency (July 12, 2009)
China Diversifies Reserves As Part of “Going Out Strategy” (July 29, 2009)
World Bank: Don’t Take USD Reserve Status for Granted (Sept. 27, 2009)
Sucre, New Latin American Currency To Replace USD for Trade (Oct. 19, 2009)
If you liked this article, please retweet it on Twitter or consider adding me to your blogroll. I’d also love it if you subscribe to my RSS feed for free tips and posts like this one delivered right to your reader or by email (posts are not for duplication).
Related Posts - What Is the World Reserve Currency?
- Market Jitters: Are We About to See the End of the Risk Rally and Bear Market Bubble?
- 4 Ways To Get Out of US Dollars and Hedge Against US Dollar Weakness
- The New Gold Standard: Will Gold Be Part of A Basket of Currencies Replacing the Dollar as World Reserve?
- State of the Economic Union: How Will Obama Get Massive U.S. Budget Deficits To Budge?
Related Articles From Other Websites
{ 5 comments… read them below or add one }
I don’t think Allen is correct in his predictions, his timeline, but he is right that the US needs to be a bigger “producer” than “consumer”, otherwise, its a long road downhill.
2012 is also the year the front end of the baby boomers will start to retire en masse… causing large gaps of funding on the incoming end for social security, etc. This is going to be a big problem, and no one is talking much about it yet.
A lot of the statistics are pretty sobering. Thanks for the write up! – Joel
Sounds like we should enjoy our current tiny recession! Not exactly an optimistic outlook, but hopefully the American spirit will prevail and adapt as necessary to the new challenges.
Yes, it’s not exactly optimistic, but realistic, perhaps. I find optimism in knowing what I can about current factors and influences so I can better position myself and make better choices going forward. There’s never perfect information, of course, but if you can learn something you didn’t previously know about – I guess it’s a kind of pragmatic optimism!