Over the weekend, Drudge posted an alarming story from CNSNews.com high on the page: "China Divests 97% of Holdings in US Treasury Bills."
What does that mean? I checked with financial hawkeye George Ford for his take. As I read it, there's good news and bad news in his analysis (below). The good news is, China is not our worst financial enemy after all. The bad news is, we are. In fact, the real story isn't China's divestiture of 97 percent of its holdings in US treasury bills, but rather what will happen next to those holdings.
George Ford writes:
The easiest way to explain it is by extending the original Drudge headline: "China Divests 97% of Holdings in US Treasury Bills; Bernanke Will Buy Them -- With Ease."
The US Fed holds much more US debt than China. Since 2008, the Federal Reserve has added about $800 billion in US Treasuries to its balance sheet, for a total as of last month of $1.4 trillion. China holds about $850 billion, or 9.5% of the total. Japan holds about the same amount as China.
More important than its actual holdings, the Fed and the federal government control even more, because they exert pressure on private institutions to purchase US debt. Michael Barone refers the Obama administration as "Gangster Government." Now there is a new phrase to describe this Gangster Government's approach to the banks: "Financial Repression."
I will let a bond expert, Paul A. Hutter, explain China's holdings, and what the US government is up to:
China is attempting to reduce US exposure but must maintain a certain level of US treasury investment in order to manage an acceptable level of yuan currency increase.
They are probably doing this by:
- letting the t-bills roll-off the books as they come due
- reinvesting the proceeds in:
a) a lesser amount of longer-dated US notes (perhaps 2-4 years)
b) some strategic investments elsewhere in the world (e.g., direct investments in South America or Africa, Spanish bonds, etc.)
c) increasing their gold reserves
In other words, China is diversifying its portfolio properly, which should not be big news.
China is no longer the critical strategic buyer of US treasury securities. The Fed, in its QE role, as well as its captive "too big to fail" banks (JPM, WF, BofA, Citi) are now buying massive amounts of US treasuries.
Under Bernanke and Geithner, the Fed and the Treasury have adopted a coercive, post-TARP policy of co-opting institutional balance sheets and influencing (forcing) them to buy treasury securities or otherwise do their bidding.
Economists Carmen Reinhart and Kenneth Rogoff, as well as Bill Gross and Mohamed El-Erian of PIMCO, refer to this policy as "financial repression," and this approach will only get more destructive as Dodd-Frank is rolled-out over time, protecting politically connected financial institutions from free-market forces while receiving government policy support in return.
If that isn't chilling enough, George sums up:
As government spending grows, and the economy stagnates, and foreign countries like China pare back their holdings of our debt, Obama and Bernanke have found some very large warehouses to store our debt. The headline warning should be:
"Banks Nationalized -- Economy in Lockdown."