We have been mystified at the utter silence on behalf of our friendly foreign funding sources at their willingness
Add the fact that currency debasement is the standard economic prescription for deflation, and you can see why our credit purveyors might be a tad concerned about taking on more dollar exposure.
Ah, but you may say, the dollar has been rising, these worries are clearly misgiven. Not so fast. The appreciation is due largely to unwinding of dollar-based loans. If you, say, made an investment in Eastern Europe and funded it in dollars, and now need to repay the loan. you will need to provide dollars, which means selling local currency and buying dollars. That activity on a mass scale is pushing the dollar higher.
Selling foreign-currency Treasuries isn’t a new idea; the US offered so-called Carter bonds, which were Deutschemark-denominated Treasuries, in the late 1970s.
What has been interesting is that even though this idea is obvious (and unless the trajectory changes, inevitable) our foreign creditors have not said anything of the kind in a public forum. Given how forward the Chinese often are, and how they seem particularly unhappy about continues dollar accumulation (even though their currency peg is the proximate cause), they have been surprisingly quiet on this topic.
Japan, interestingly, seems to be playing the heavy. That actually in a perverse way makes sense (and one wonders if there was some orchestration of these trial balloons with other foreign interests, particularly since Japan is trying to make nice with both the US and China). After all, if America’s good buddy and military protectorate is making noises about foreign currency Treasuries, it is hard to dismiss the idea out of hand.
From Asia Times (hat tip reader Chris):
Japanese economists, increasingly concerned that the United States might seek to pay its enormous and growing debt obligations in a weakened US dollar, are looking to the possibility of US Treasuries being issued in yen.
The US government needs to borrow at least US$1 trillion in the coming year, excluding the US Treasury’s $700 billion plan to bail out the financial and other industries, said Kazuo Mizuno, chief economist in Tokyo at Mitsubishi UFJ Securities Co, a unit of Japan’s largest publicly traded lender by assets. That amount is likely to grow as the US government continues to rescue failed parts of the economy and has to raise more debt – that is, issue overnment bonds, or Treasuries – to fund such rescues.
Since 2004, when the amount of the government bond issuance reached an annual average of $400 billion, 94% of new buyers of US government bonds have been foreigners, Mizuno told Asia Times Online.
One measure of the increased concern at the ability of the United States to finance its enormous deficits in the future is the rising cost of credit default swaps bought as protection of Treasury debt. These traded near a record high on Tuesday, with benchmark 10-year contracts on Treasuries increased to 42 basis points, or 0.42 percentage points, from around 20 in early September. The contracts have also risen from below two basis points at the start of the credit crisis in July 2007.
While it remains unlikely that the US government will default on its debt, a weaker dollar would ease the burden of payment on existing debt.
In the past few months, the US dollar has strengthened against other major currencies, with the notable exception of the yen, even as the country has been at the epicenter of the deepening financial crisis. That dollar strength is not expected to last.
“There is no wonder the dollar will weaken,” said Eisuke Sakakibara, Japan’s former top currency official and now a professor at Waseda University. “The dollar now looks strong for a technical reason. The money the US financial firms had invested in the world is being repatriated into the homeland, causing dollar-buying. But once this conversion into the dollars is done, the currency will head south,” Sakakibara said …
Faced with the unprecedented growth of the US budget deficit and the prospect of an increasingly weaker dollar compared with the yen reducing the value of Treasury debt held by Japan, economists in Tokyo are calling for the administration of president-elect Barack Obama to issue US Treasuries denominated in yen and other currencies…
“The US will be forced to issue foreign currency-denominated US Treasures in its hour of need,” said Mizuno. “The US cannot finance its deficit by itself. The US financial system cannot survive without foreign investors. We will see ‘Obama Bonds’ in the future.”
With the US owing increasing amounts to foreign nations, the confidence in US Treasuries continues to be shaken, said Masaaki Kanno, chief economist at JPMorgan Securities Japan Co in Tokyo, said. “This will push up long-term yields, and the dollar will be sold,” said Kanno, speaking at the forum in Tokyo on Sunday….
Looking ahead to 2009, foreign buyers such as Japan, China and other emerging market central banks are likely to reduce their holdings of US Treasuries rather than increase them, as their own countries face massive funding needs to buoy their economies at home and as America will continue to face financial instability and deteriorating economic fundamentals.
Japan holds the world’s second-largest foreign reserves, totaling about $1 trillion, following China, which has about $2 trillion in forex reserves, including some $600 billion worth of US Treasuries. Japan plans to provide up to $100 billion to the International Monetary Fund, which would reduce the nation’s holding of short-term US Treasury bills.
China on November 9 announced its sweeping economic stimulus package valued at about 4 trillion yuan ($586 billion), to be spent over the next two years. Market players are speculating China, to secure financial resources, would reduce its holding of US Treasury securities rather than increase them.