Posted on 08/05/2004 10:56:27 AM PDT by Destro
Foreigners own half US debt, tipping point unclear
Wed Aug 4, 2004 04:23 PM ET
By Laura MacInnis
WASHINGTON, Aug 4 (Reuters) - Data showing foreigners own half the U.S. debt has raised concerns about a possible tipping point for America's reliance on foreign capital, though the U.S. Treasury Department sees little risk from the holdings.
A graph in a Treasury Department report this week on borrowing needs showed foreign holdings made up 50 percent of total privately held U.S. public debt, which excludes Federal Reserve holdings, as of May 31.
Foreign holdings accounted for just 20 percent of U.S. debt in 1993 but they have swelled in recent years as Asian banks loaded up on U.S. Treasuries, seeking to depress their currencies against the dollar to boost exports.
Economists say the influx of offshore capital has helped support the U.S. economy by lowering market interest rates and bridging the country's large budget and trade deficits.
Some, however, see the high foreign holdings level as a vulnerability.
"It shows you the increased dependence of the U.S. on foreign capital. It certainly is a risk factor going forward," said Stefane Marion, assistant chief economist at National Bank Financial.
"It is very difficult to tell at one point we are at the tipping point. But we are getting closer," Marion said.
"You would need to see a significant slowing of U.S. economic growth or a sharp deterioration of the productivity outlook in the U.S. to have a significant run on U.S. assets," he said, adding: "so far, so good."
With the presidential election less than three months away, the high foreign debt level has also bled into politics. Former President Bill Clinton said last week the Bush administration was borrowing from foreign governments, "mostly Japan and China," to bridge its deficit.
"Sure, they're competing with us for good jobs but can we enforce our trade laws against our bankers?," he said in an address to the Democratic National Convention.
BUY AND HOLD
A Treasury-commissioned panel of investment banking executives concluded that foreign buyers are generally "buy-and-hold" investors and unlikely to sell their securities en masse.
"The committee overwhelmingly felt that broad foreign ownership of Treasury securities was beneficial, in that it lowered domestic interest rates," minutes of the Borrowing Advisory Committee meeting released on Wednesday said.
"The idea that foreign investors would rapidly 'dump' bonds is not consistent with historical experience and illogical, since it would be detrimental to foreign holders' markets."
At a media briefing on Wednesday, Treasury's Acting Assistant Secretary for Financial Markets Tim Bitsberger said the United States should be more engaged with foreign buyers.
"In the same way we try to have an open dialogue with market participants domestically, we at Treasury feel we need to have an open dialogue, as much as we possibly can, with the international holders," Bitsberger said.
"We strive to have a broad diversified ownership. What we are trying to do ... is just to make sure to understand their motivations and needs so that the marketplace continues to function as well as it has," he said.
Bitsberger also said the Treasury has encouraged foreign holders to be more active in the repurchase market, which would entail lending notes for short periods to help boost liquidity in the overall debt market.
Stephen Stanley, chief economist at RBS Greenwich Capital Markets, said while the current foreign holdings level is not a problem in and of itself, "you'd like to think it's not going to go too far above 50 (percent)."
However, Stanley did not anticipate a run on Treasuries.
"Obviously there may come a point in time when foreigners are less willing to hold our debt, but it's not like a light switch that gets turned from on to off," he said.
"This happens gradually over time, it happens at different prices ... I don't think there has to be necessarily a single cataclysmic event."
Charles Lieberman, chief economist at Advisors Financial, said the current foreign holdings level had ignited debate over how large the portion could become.
"I don't think it matters if it's at 50 or 45 or 55. But there are are longer-term trends here that are unsustainable," Lieberman said.
"You can't continue to sell your bonds to foreign investors at a higher and higher rate, because at some point they'll own 100 percent. Obviously that's a constraint," he said.
China and Saudi Arabia have us by the short hairs? Nah - they would never pull out of our economy as a threat.....
Are tipping points worse than bubbles. I get these so confused....
The notion that foreigners are doing us some sort of "favor" or there is some sort of sinister cabal out there is just plain silly.
If we can keep this sort of growth for a decade and put the Fed's rates back up to were they were in the 1990's people will be scrambling for dollars and dollar back securities. This article also seems to be confusing public and private debt. When they use phrases like "a run" on assets they seem to be implying that somehow foreigner's can foreclose on Government debt. More electioneering.
I’d always ask where in Germany they were from and more often than not they’d reply “You haven’t heard of it” or something along those lines. After a short time of getting rebuffed by them, I adopted the strategy of going a little further:
Me: So, where in Germany are you from?
Bucket Head: You’ve never heard of it.
Me: I might have, what’s the town’s name?
B.H.: Dusseldorf.
Me: Yeah! I know Dusseldorf!
B.H.: Really??? How do you know Dusseldorf (thinking maybe my father was in the military and stationed in Germany)?
Me: Oh, they used to bomb it all the time on Hogan’s Heroes. Do you live near the old ball bearing plant or the munitions factory?
My favorite though, was a particularly arrogant man by the name of Mr. Casper. Instead of going the old Hogan’s Heroes route, I decided to tell him about “A very famous football player by the name of DAVE Casper.” I have to take my hat off to him as he did tolerate my five minute long monologue on the distinguished career of some guy he never heard of who played some game he knew nothing about, delivered at a cadence that was just a little bit too fast for him to translate and understand.
The best part though, was the look on his face when he came down to the front door later and was greeted by the doorman who said “You know, Mr. Casper, I was just thinking, we have a very famous ghost in this country by the name of Casper…”
Owl_Eagle
”Guns Before Butter.”
Exactly. I am amused whenever a politician resorts to comparing the federal budget to a family budget, or even a company budget. There is no doubt that it is good for a country to be "flush" financially, but debt such as this is not a curse as long as it is used to expand the economy. IMHO, a federal surplus is worse than debt. It means we are overtaxed. That government is charging more than its services (?) cost, that government is "making a profit" to the detriment of the public.
(1) This debt cannot be "called in" all at once - there can be no "run on the US" the way there are runs on banks. The debt is issued with a stated maturity and cannot be called in until the maturity date.
(2) No one has an interest in "dumping" US debt. Professional traders like the ones at the Japanese and Chinese banks know that if you sell out of debt positions in any kind of volume you destroy the value of any remaining unsold portion of your portfolio.
If any country ran to sell out of all their US debt all at once, they would crush their economy, much of which is collateralized by US debt obligations.
(3) Insurance companies and retirement funds in the US and every other major country are required by law to invest in A rated securities or better. US bonds are the largest and most important debt component of such portfolios. You cannot effectively run an insurance or pension fund without holding US government bonds. Any mass sale of US bonds would result in a mass buy of them within minutes by worldwide financial institutions eager to buy US bonds for a few basis points below their cost.
These are Bonds, not a loan they can call in if they get pissed at us. And when they come due, they will buy more, not take their money home, because there is no place else in the world to safely place that much money.
So9
LOL!
as long as we can get them to keep buying, eh?
Reminds me of the hype concerning the Japanese in the 1980's and early 1990's. Remember?
The Japanese were buying up property during their boom years of the 1980's. Stories about how the Japanese would then leverage their ownership of landmark properties so as to damage our economy were all over the place.
some leading institutions predicted that by 2000 the Japanese would own the vast majority of private property here in America.
But a funny thing happened on the way to the year 2000....the Japanese economy imploded, we learned that their own government had created fraud on a massive level to prop up its industrial base....
This falls into the same catagory folks.
Just ask the Japanese neighbor of yours....oh wait, sorry, that didn't happen, did it?
It's being used to expand an already bloated, inefficient, and corrupt federal government.
Exactly. That's how Harley-Davidson got over the hump from red to black ink. They had CitiBank by the short ones.
You make a good point. Growing government with debt is the Democrats economics. Republicans should know better. Fighting a war with debt, however, is another matter. And we are at war.
On top of that, almost all other world economies are significantly export led. It makes no sense to destroy your customer even if you could.
True story in a semi-related vein: I once got into a drinking bout with some New Zealand merchant mariners in Yokohama, Japan, while watching the '84 L.A. Olympics at a bar/coffee house. Three hours later I was drunk and had no yen left to get home on the busses and trains. I had to wander around for a while to find a department store that would exchange my greenbacks for yen. But, as drunk and broke as we were, the Kiwis and I managed to scrape up a decent tip in the native currency for the bartender who watched us and provided the Foster's as he and his establishment became fuzzier and blurrier by the minute!
LOL! Excellent story!
True, but this war isn't taking up near the resources as a WWII, or the Cold War. Even the entire military budget, as a percentage of GDP is around 4%. Most of the deficit is going toward the vote buying programs of incumbents.
Self bump for later
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