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The New York Times is reporting this morning that the Chinese government may be losing its ability and desire to support low interest rates in the United States by continuing to purchase treasury notes in the hundreds of billions of dollars.
Just as President elect Obama has stated, the economy 'could become dramatically worse.' News from overseas lends credence to our dilemma. The NYT quotes Ben Simpfendorfer, an economist in the Hong Kong office of the Royal Bank of Scotland: "All the key drivers of China's Treasury purchases are disappearing - there's a waning appetite for dollars and a waning appetite for Treasuries, and that complicates the outlook for interest rates."
Under normal conditions, during the last decade China has acquired over a trillion dollars of our debt and kept it. This has supported the dollar, kept us buying their goods, and in turn propelled the rapid growth of the Chinese economy. Fitch Ratings, the credit rating agency, forecasts that China's foreign reserves will increase by $177 billion this year. However, this would be a large drop from an estimated $415 billion accumulated last year.
In the United States we have taken advantage of world demand for our debt so that we could attempt to stabilize our economy, which is in pitiful shape, by allowing the Federal Reserve to lower interest rates down to basically zero. There is still demand for our notes driven in part by fear of uncertain global markets as witnessed by there being few safe havens in the last 18 months.
Should this demand wane it would put pressure on the Fed to raise rates to prevent the serious possibility of distressingly higher rates of inflation. This does not seem to be a near term problem in 2009, and perhaps as far out as 2011, but all bets are off about what might happen after that. At this point everything we are hearing indicates years of growing debt and high unemployment.
The Chinese have announced several stimulus packages of their own to support their economy and this is putting stress in other areas. Unemployment in the U.S. leads to severe strains on families and businesses trying to make ends meet. In China, it is likely to lead to violent protests in the streets.
If we are forced to live with inflation as well, the concerns about global warming may pale in comparison to the possibility of entering an economic ice age for a decade.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money.
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Reader Comments (Page 1 of 1)
1-08-2009 @ 5:26PM
BHarrison said...
Would this not be the tipping point for a dire economic stall out for any recovery efforts? China is only going to a certain point in loaning our cash back to us.
The inconceivable is becoming conceivable.
1-09-2009 @ 8:28AM
Irish said...
"The inconceivable is becoming conceivable." This wasn't difficult to conceive - gross greed throughout this "me" generation has brought this on. The U.S. got away from hard work - making things that improve lives, helping others within its own borders, became lax in immigration control, permitted our eductational system to crumble, etc. Making money off of money has been the "job" of the past century - it was only a matter of time before this happened. It's not over yet - we WILL crumble unless we go back to work becoming a nation of invention, producing goods, and protecting our interests - NOT for the sake of money, but for the sake of its people. If we don't, China will be buying what is left of us.
1-10-2009 @ 6:00PM
Shannon Melton said...
If you haven't already, you might enjoy seeing what Paco Ahlgren has been writing about Treasuries.
Paco Ahlgren has written extensively recently about the Treasury bubble.
http://experienceiseverything.blogspot.com/2009/01/money-supply-11008.html