Two countries, the United States and China, are playing financial poker, with the U.S. Treasury and the Federal Reserve on one side and China on the other.
On one side, wearing a visor and dark glasses, we have Ben Bernanke of the U.S. Federal Reserve, who must fund our $1.8 trillion deficit. So the U.S. Treasury and the Fed are issuing record amounts of treasury securities. Last week alone the Treasury issued $200 billion of debt securities. The results of at least two auctions were a bit shaky.
At the table, opposite the U.S. Treasury, are the Chinese players, also wearing dark glasses. When the play went to China, China took a pass on two of last week's auctions. The Chinese are worried about the high level of U.S. debt and are uncertain if they should keep buying U.S. Treasuries.
Then we have a third group of players who quit the game. These investors sold U.S. Treasuries to invest their money in other, riskier investments, such as corporate bonds and stocks.
Back to the two key players. The appetite for U.S. Treasuries is waning, thus causing the Treasury to sweeten the deal by raising the rates at auction. The $200 billion in sales went off without a hitch this week, but what happens from here on in is unclear.
The Chinese on the other side are caught in a box of their own. They own $800 billion of U.S. debt. If interest rates go up, their principal declines and China stands to lose a large chunk of money (as rates go up, the price declines.)
This was the backdrop for President Obama's dialog with Chinese officials this past week. As he explained, the U.S. and China are joined at the hip and must cooperate with each other to maintain financial stability in world markets.
Do you believe that China will continue buying U.S. Treasuries?
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Reader Comments (Page 1 of 1)
8-02-2009 @ 4:49PM
insuresave said...
China will continue to do what is good for China, the rest of the world, be damned!!
Jim
8-02-2009 @ 6:29PM
ij70 said...
They will probably stop buying them very soon.
8-02-2009 @ 8:05PM
Frank said...
China is not stupid enough to foot an Obama economy..
8-03-2009 @ 12:18AM
Benjamin said...
Well essentially every nation is going under. So what would it really matter? "Blind leading the blind."
8-03-2009 @ 3:47AM
Ian Sassoon said...
I have to disagree with the first two responses. China has little to gain from not buying our debt. The bigger question is how does our government expect to repay all this cash? 'The blind leading the blind' is more on target.
8-15-2009 @ 10:12AM
Reality Check! said...
Everyone has missed the bigger picture here. It is the overall strategy of the Chinese government to weaken the US economy and strengthen its own economy and position itself for world domination. They are pursuing this in phases: Step 1. Sell a lot of cheap stuff to the world and make those countries dependent upon cheap Chinese labor (1980s-Today). Step 2. Use revenues generated from trade to a) increase purchases of US Treasuries, b) increase military spending, c) weaken US dollar and have it replaced with an alternative currency (Today's reality). Step 3. Wait for a weakened US economy where the US is forced to take on more debt and then China begins the process of not buying any more US Treasuries and securities and selling them and making a profit (Now- Mid-term US elections). Step 4. Use Chinese leverage to get what it wants, e.g. Taiwan and the Yuan as the primary currency of trade. Step 5. World Domination.