Brad Setser

Follow the Money

Cross border flows, with a bit of macroeconomics

Print Print Cite Cite
Style: MLA APA Chicago Close


A bit more to worry about; foreign demand for long-term Treasuries has faded

by Brad Setser
March 18, 2009

I wanted to highlight one trend that I glossed over on Monday, namely that foreign demand for long-term Treasuries has disappeared over the last few months. Consider a chart showing foreign purchases of long-term Treasuries over the past 3 months. Incidentally, the split between private and official purchases in this data should largely be ignored. The revised (i.e. post-survey) data generally have attributed nearly all the flow from 2003 to the official sector.

The rolling 3m sum bounces around a bit, but foreign demand for long-term Treasuries in November, December and January was as subdued as it has been for a long-time. Among other things, that fall in foreign demand for long-term Treasuries after October suggests — at least to me — that the big Treasury rally late last year (and subsequent sell-off this year) doesn’t seem to have been driven by external flows. Foreigners weren’t big buyers of long-term Treasuries back when ten year Treasury yields fell to around 2%.

There also is at least a passing resemblance between a chart of foreign demand for US corporate bonds and foreign demand for Treasuries.

It is also striking that — for all the talk of safe haven flows to the US — foreign demand for all long-term US bonds has effectively disappeared.

What have foreign investors been buying? Short-term Treasury bills. In huge quantities. On a rolling 3m basis, foreign investors bought nearly $500 billion in bills at the peak of the crisis.

However, that surge in demand for bills now seems to be fading.

The fall off in total TIC flows in January reflected private bill sales. The official sector is still buying — $100 billion in bill purchases over the last 3 months of data only seems small relative to the post Lehman peak. But with global reserve growth slowing (even China doesn’t currently seem to be adding to its reserves), central banks won’t be as large a source of demand for Treasuries going forward as they have been in the past.

That means a fall off in central bank demand for Treasuries wouldn’t necessarily be a sign that central banks have lost confidence in the US Treasury market. It could equally be a sign that a lot of central banks no longer have any new funds to invest.

That said, a lot of central banks are now holding an awful lot of zero coupon (or close to it) bills. At some point they might be induced to buy somewhat longer-dated Treasuries to pick up a bit of yield. No trend — including the current vogue for bills — lasts forever.

Why does this matter?

Foreign demand for Treasuries hasn’t kept up with Treasury issuance, but it undeniably has been strong. Over the last 12 months, net foreign purchases of Treasuries financed much of the US current account deficit.

The trade and current account deficit has fallen substantially as a result of the fall in oil prices, so the US needs less external financing now than in the past. But it still needs some.

The “quality” of the financial flows into the US consequently bears watching. A modest revival in foreign demand for longer-dated US assets would be a positive sign. To date, the sale of US assets abroad and a scramble for liquid dollar assets has provided the US with more than enough financing to sustain its deficit. Those flows though may not continue.

And if — as seems likely — foreign demand for Treasuries fades long before the US fiscal deficit, the US Treasury will need to sell an awful lot of Treasuries to American investors. For the past several years I have argued that it was almost impossible to overstate the impact of central bank demand on the Treasury market.

That may no longer be the case going forward.

The world is changing. Global reserves aren’t growing. The echo from their past peak that we observe in the current Treasury data will fade.


  • Posted by Curious

    i would be a buyer of t-bills but not at current rates. it’s hard to believe nations don’ think they can get a better a return than 3% over the next 30 years….

    Speaking of the Treasury, seems as if Geithner found somebody from Wall Street to assist the treasury, Lewis Alexander of all people…..FYI he’s the former Top economist from Citigroup.

    My sources tell me, that it was almost IMPOSSIBLE for the Treasury to find someone from Wall Street to replace Paulson. Additionally I’ve heard it’s also been nearly IMPOSSIBLE for Geithner to find assistance or build expertise from the Top Guns on Wall Street.

    What’s the deal here? Do guys on Wall street nobody wants their name associated with this crisis, because history shows it, if history is right this crisis will get far worse.

    And despite the talk of resignation for Geithner by guys in the media, the case being nobody on Wall Street wants to work with our without Mr. Geithner at the Treasury.

  • Posted by anon

    “That may no longer be the case going forward.”

    It’s called (foreign) disintermediation.

  • Posted by Jeff Burke

    Curious has it right. Taking the Treasury job is like being the next coach of a crummy franchise like the Raiders, Knicks or Maple Leafs. Only the desperate take it at the market price.

  • Posted by charlie

    I don’t see this as a potential problem. The reason short terms are preferred over long terms is because of low interest rates. Getting 1% for a year or two and hoping to roll it over at a higher rate is better than locking in 3% for 10 or more years.

    The real concern will occur if the debt doesn’t get rolled over. We’ll see what happens in a year or two.

  • Posted by Indian Investor

    Charlie – thanks a lot, I thought about it but couldn’t figure out till now how somebody might make a choice b/w short and long term Treasuries.
    I’d like to share my understanding as to what determines the volume of China’s dollar purchases. They provide a “trading band” guidance to money changers, who receive the USD from exports. Similarly, money changers pay out foreign exchange to importers against RMB. As the volumes in the hands of the money changers fluctuate, the Central Bank buys or sells dollars in trasnactions with them to maintain the trading band. I suspect this is how a currency peg works.
    Now the peg determined by the Central Bank is used to calculate the profitability of export and import businesses, and vice versa.
    As the US demand for China exports falls, automatically the currency peg system results in lower USD purchases.
    Many countries don’t have a peg, and don’t intervene much. Suppose you take away China’s peg, what that means is that given the huge supply of dollars versus RMB, the USD will weaken against the RMB quite a lot.
    The causality is the currency peg, and not the trade volumes and extent. These mechanics are ignored in many of this blog’s essays and comments.For instance, lower export volumes don’t automatically lead to lesser reserve growth for exporters.

  • Posted by Mark Foley

    Charlie is right. From a risk reward perspective, buying a long dated treasury looks like a built in capital loss as soon as rates go up. It is a question of when not if, and the loss will probably be much bigger than the foregone interest. This is the equivalent of keeping powder dry.

    Negative global economic growth means there aren’t excess reserves to invest as Brad points out. The shrinking pool of global savings would normally bid up interest rates, linking back to the risk reward trade-off just mentioned.

  • Posted by Curious

    @ jeff-

    true to rumors swirling on Geithner replacement, but the problem is nobody from the street will risk his name on the position.

    it’s a true nightmare growing between Washinton and Wall Street.

    Behind the scenes, tempers are running high…

  • Posted by DJC.

    From London FT, foreigners net sellers of US Dollar by $43 billion in January. Dollar strength entirely due to Federal Reserve’s $115 billion swap of currencies with foreign central banks.

    Foreign investors cut their holdings of US long-term securities in January although China and Japan purchased more Treasury bonds, according to data released by the Treasury on Monday.

    The latest Treasury International Capital report, known as Tic, revealed net sales of $43bn in long-term US securities in January, following purchases of $34.7bn in December.
    The big reversal in January was not accompanied by a drop in the dollar. The dollar index rallied nearly 6 per cent in the month, marked by a notable decline in the euro.

    Alan Ruskin, strategist at RBS Greenwich Capital, said: “Sizeable net long-term outflows, with very weak net short-term inflows would normally smack of dollar weakness.” One way to explain the dollar’s strength in January may be the role played by dollar swap lines set up by the Federal Reserve. In January, the Fed’s balance sheet showed a contraction of $115bn in dollar swap lines with other central banks.

    Traders said this may explain how the drop in net dollar liabilities had not unsettled the dollar.

  • Posted by DJC.

    The Federal Reserve can no longer just continue to print unlimited “fiat dollars” under the global US Dollar hegemony regime to purchase the rest of the world’s “real economic wealth industries”.

    China rejects Coca-Cola’s bid to buy major juice producer Huiyuan following outcry

    Coca-Cola’s purchase of Huiyuan Juice Group Ltd. was rejected on anti-monopoly grounds, the Commerce Ministry said. It would have been the biggest foreign acquisition of a Chinese company to date.

    The rejection might also be a response to U.S. criticism of Chinese investments, said Joseph Cheng, director of the Contemporary China Research Center at the City University of Hong Kong.

    He noted the 2005 bid by CNOOC Ltd. for American oil company Unocal Corp., which was withdrawn after critics said it might endanger American energy security.

    “China is saying, `Look, if you reject CNOOC’s acquisition of Unocal, I can do the same, so why don’t we respect each other?'” he said.

  • Posted by Terry

    I’m intrigued by CURIOUS’ comments. Without any inside information, I have increasingly begun to believe that most WS types simply don’t want to be associated with Treasury, not to mention the public laundering of their taxes, nanny nationalities, etc.

    My first thought was that this was because they don’t want to be associated with the Summers/Geithner economic policies, especially for the financial sector.

    Increasingly, however, I am thinking it’s because they can foresee working endless hours for much less pay to achieve little in the face of continuous criticism from every quarter. Why give up a cushy job on WS for the incessant cacophony of WDC??

  • Posted by fatbrick

    Brad, I do not see the private American investors stepping up as you suggested. It is basically Fed buying in practice already.

  • Posted by babar

    if i were in any way qualified to work for the US treasury, i would go hire an illegal nanny for my kid TODAY.

  • Posted by MakeMeTreasurySecretary

    Would you (people in general “you”) buy a thirty-year bond at 3.6-3.8% in currency X when you suspect that, just maybe, the currency is overvalued by 20% and you know that the central bank targets an inflation rate of about 2%?

    Obviously, the people who own trillions in money-market and short-term treasuries have already answered NO! So, no surprise if even clueless foreign buyers and central banks start also saying no.

    The questions I think we are all interested in, apart from what took them so long, is: Can the US economy handle this developing trend? It seems like a lot of the readers in this and other blogs expect some sort of Armageddon.

  • Posted by jonathan

    This poses an interesting conundrum: need to keep long yields down to encourage investment and the economy generally but need to raise yields to induce buyers. It’s also somewhat ironic that obsession with short-term profits drove us into this mess and now this mess is investing us in the shortest of assets. What’s next? Mayfly futures?

  • Posted by hbl

    I don’t see why US demand for treasury bonds can’t fill in the gap as foreign demand diminishes — this foreign demand reduction does not change the number of dollars looking for investment, just who holds them. What would be required is a higher-than-recent-years propensity to buy (and hold) treasuries versus other assets on the part of the holders of those dollars. This seems quite feasible in the context of:

    (1) inability of the Fed to create inflation,

    (2) recognition that as the Fed/treasury guarantees or buys toxic assets, the private parties relieved of those assets will look for new assets with maximum “safe” yield, and competing private debt issuance could be low for a long time to come, and

    (3) an increasing savings rate (see Richard Koo via gaius marius),

    (4) quantitative easing

    Yes, treasury supply will be massive so it’s not a clear cut case, but IMO the treasury bears don’t look closely enough at the potential demand dynamics. While there are differences, apparently no one expected Japan to be able to fund its government deficits, either.

  • Posted by But What do I Know?

    Maybe this is a a naive question, but what is the difference between the Chinese or Japanese central banks buying Treasuries and the Fed buying Treasuries–they are both monetization, aren’t they? Also, what is the difference between the Fed monetizing debt and buying three-month T-bills at ).25% (or whatever)–and they do (will) need to buy them at that price to keep rates that low?

  • Posted by Curious

    @ Terry

    i wouldn’t be surprised to see Larry Summers as T-secretary sooner than most expect. My belief is Summers was suppose to be the original T-secretary but there were obstacles with his public image which have been washed with the current environment….

    *please note this is my opinion.

  • Posted by Curious

    some argue, that under Geithner the banks will have difficulty landing round II of the bailouts that dire balance sheets are in need of…

    There’s certainly tension in the house & senate. Things are not looking to the upside on Tarp2.

    The current Financials rally is almost a conspiracy of optimism.

  • Posted by Cedric Regula

    Here we go. the Fed just announced they are buying 300B in long term treasuries. Dollar index just dropped 2% on the news.

  • Posted by Cedric Regula

    hehe. Here’s the 10 year bond reaction.
    2.6260% -0.3770

    Is there any doubt that no one buys bonds with the intent to hold to maturity?

  • Posted by LAS

    Who wants to be in long bonds when rates have no where to go but up? I think the Chinese have made themselves clear. It isn’t (yet) a question of whether the U.S. is a safe place to invest; it is that they are deeply worried about losing the value of their investment.

  • Posted by gaius marius

    hard to imagine that the FOMC announcement and the tale of the TIC aren’t correlated.

  • Posted by C. Michael Reilly

    With foreigners buying fewer govies , sounds like Bernanke is looking to influence all the ‘safe haven’ , risk averse lemmings into long govies so the smart $ can invest it and raise inflation expectations beyond borderline pathologically low levels here. Timely post Brad. Thanks.

  • Posted by Cedric Regula

    gaius marius responds:
    “hard to imagine that the FOMC announcement and the tale of the TIC aren’t correlated.”

    No one in their right mind could suggest otherwise.

    Latest move on the 10 year.
    2.5520% -0.4510

    Pimco must be tripping all over themselves, buying with the intent to sell them back to Ben over the next 6 months.

    Dollar index down almost 3%, big move down against the yen and euro, so there go those long term holders. Even losing against the pound, if that is conceivable

  • Posted by C. Michael Reilly

    continuation from previous post of 3:12pm mar 18 : ; oops I guess Uncle Sam IS the aforementioned ‘safe haven’ , risk averse lemming … in that case what is the cost to tax payers … or government credibility ? Why is Bernanke so concerned as to do this? Is this smart or … not?

  • Posted by JL

    What about the monthly net private flows? Seems like your thesis about private demand holding up is unraveling?

  • Posted by Cedric Regula

    There’s more to Ben’s deep pockets!

    “The Fed also said it will buy more mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac to help that battered market. The central bank will buy an additional $750 billion, bringing its total purchases of these securities to $1.25 trillion. It also will boost its purchase of Fannie and Freddie debt to $200 billion.”

    “In addition, the Fed said a $1 trillion program to jump-start consumer and small business lending could be expanded to include other financial assets.”

    Who needs a banking system???

  • Posted by MakeMeTreasurySecretary

    In practical terms, is this as close we can get to seeing the Fed officially devaluing the Mmerican dollar?

    Who will devalue next? My bet is on Yurp. Between housing and tourism in Spania and Hellas and industrial production and exports in Germania, I think the powers that be are looking for ways to weaken the young euro.

  • Posted by Cedric Regula


    In philosophical terms, it is the final step in severing “money” from it’s “cost”, or investment value, depending on what side of the bargaining table you’re on. It’s the only thing that gives fiat currency it’s value.

    But the thing that remains is the current lack of choices for capital, and the overwhelming attractiveness for all debtor countries to follow the US in it’s footsteps. Actually, it was Britain that went first.

  • Posted by gillies

    brad, i am quite prepared to be corrected on these points :

    japan – the way the japanese economy is suffering, they will have no surplus to invest in treasuries, or anything else – so will they be sellers ? and are the chinese taking this prospect into account ? an old obsession of mine, brad, but what use brilliant analysis of china if behind your backs another player may have no option but be a net seller ?

    china – if china fears volatility in oil prices, they try to lock in a deal for some years ahead, so what potential for them negotiating a loan to america ? i e like a fixed rate mortgage, instead of a sub prime variable result long term treasury purchase ? or yuan denominated ?

    does not a rebalancing of global finances – if achieved – mean a reduction in surpluses to invest back in the u s from whatever source ? likewise does not a global contraction mean the same thing ? reduced flows ?

    and if all of this is so – does not a stimulus based on buying your own treasuries amount to little better than a failing company buying its own shares ? there have been no earthquakes, no significant fires, no wars except the usual habitual and ongoing ones, no volcanic eruptions, no tsunami. it is only the pixels that are in a disordered state. so what is the big problem ?

    you either clamp down on international trade (go protectionist) or you allow the pixels to reflect current globalisation, in which case the real imbalance is that the american (developed country) worker burns 12x more oil than the chinese (developing country) worker. . . . . so the former face obsolescence, like hummers . . .

    is that not the reality ?

    give me armageddon any day, if the alternative is disneyland.

  • Posted by Cedric Regula

    One more historical correction.

    Japan did it years ago. They now have the same amount of government debt as the US, but spread across half the population.

    No one spends money their because they think the government is going broke and their pensions will be no good. Capital leaves the country to get any return elsewhere.

  • Posted by WStroupe

    The Treasury has been issuing tons of short-dated Treasuries, and global investors (both private and official) have been scarfing them up pretty good. But the stress the Treasury encounters by having so much short-term debt that has to be regularly refunded as the notes come to maturity is very uncomfortable and dangerous – the Fed wants to take the present very steep yield curve and lengthen it by issuing medium and long term notes. Because, what if investors at some point begin to balk at rolling over their short-term Treasuries? Perhaps this might happen if risk aversion eases somewhat and investors decide to venture more into other, non-U.S. instruments that offer yields better than the 0% they’re getting in short-term Treasuries. The U.S. would then be flooded with requirement to pay out money for maturing short-term Treasuries that investors aren’t going to roll over into new U.S. sovereign debt. So, in any case, the Treasury doesn’t like such a steep yield curve for very long – it has to be lengthened out for stability reasons.

    Enter the Fed’s purchase of medium and long-dated Treasuries, which no one else wants because they’re fundamentally a bad investment. The Fed’s becoming the ‘investor of last resort’ here. And it’s ‘printing money’ bigtime via this new program, and that’s dollar-debasing via the feeding of the inflation monster. So the dollar is falling on the announcement.

    Short-term, the Fed will probably get a lowering of interest rates on mortgages and the like. But whether that’s really going to spur recovery of the economy is an open question. Job losses continue. This economy needs a lot more than low interest rates. It needs a reversal of the job losses so people have money they can spend.

    Global investors are now going to be more convinced than ever that they need to hedge against dollar inflation, because the Fed is fueling inflationary forces ever more powerfully. If medium and long-dated Treasuries rise for a time on the Fed’s purchase program, doesn’t that help China in the sense that it gives China a relatively brief window of opportunity to divest of these Treasuries in favor of something else (short-dated Treasuries and hard assets) before the Fed’s effort eventually backfires by failing to be able to keep yields on the longer-dated Treasuries low? The Fed can’t keep them low indefinitely, because inflation will eventually break the back of the program.

    I think you’ll see some investors scarf up medium and long-dated Treasuries purely with the intent of selling them off to the Fed for a profit, as another poster here suggested, but I think the net effect of the Fed’s program will first be that global investors will position themselves even more to be in the short-term instruments, ready to exit Treasuries quickly, and that will tend to thwart the Fed’s effort to lengthen the yield curve on sovereign U.S. debt. Thus, it seems unlikely to me that sufficient longer-dated Treasuries will be bought by global investors, who will largely prefer to move into very short-term debt for fear of getting raped by dollar inflation.

    To me, this whole move by the Fed smacks of desperation and huge risks, and it looks like the Fed is ensuring a dollar crisis not far down the road. The dollar’s got to be looking more and more ugly for investors thanks to this new program. That’s no way to “solve” the crisis, is it? How can China’s leaders look at this and feel that the U.S. is ‘ensuring the safety of our investment’? Short-term, maybe, but not in the medium to long term. Am I missing something?

  • Posted by Curious

    maybe i’m wrong here, but we’re surely setting the stage for a mega-currency crisis.

    the move today, by the Fed has to be one of the largest risks in U.S. history.

    For some reason i’m beginning to worry that retirees who lost fortunes in the 401K, may next get burned holding savings.

    If the Fed were publicly traded, I’d like to buy puts expiring Jan, 2010.

  • Posted by cmc313

    Dr. Sester:

    What additional tools does the Fed have left? If printing money via purchase of treasury and MBS fail to jump start the economy, what’s the next silver bullet? Buying stocks to create paper wealth?


  • Posted by Cedric Regula


    ‘If the Fed were publicly traded, I’d like to buy puts expiring Jan, 2010.”

    You can, sort of. TBT is an ETF which double shorts the 20 year treasury index. But it doesn’t directly capture the magic of a dollar crisis.

    I’d like to add a real estate crisis to wstroupe’s list of concerns. If the Fed is successful in driving down mortgage rates to unbelievable levels, with the intent of supporting prices, then new buyers will have the same problem we have now when interest rates go back to scarcity of credit from profit oriented sources. Property prices will get nailed as mortgage rates increase, probably dramatically.

    So we are pushing all the credit bubble problems into the future again. The only thing that may save the present is people decide the present is safe for now and we’ll worry about the future if it comes. But I’m getting tired of watching the markets everyday to see if we are still alive.

  • Posted by Curious

    @ cedric,

    agreed, may work for a few months, but the problem gets larger and larger as the global imbalances continue to grow day after day.

    one opinion of today’s Fed move:

    1. A hint to Prime Minister Wen that the U.S. does not care nor respect his comments which made headlines throughout the world

    2. A direct hit at Germany, Europes largest exporter to donate some of it’s surplus to eastern europe, thus depreciating the Euro.

    My opinion is the Fed is playing with fire. I dont see any winners, especially not the 300M americans living in the United States getting much from this.

    Some could argue it also gets us “that much closer” to a potential AAA downgrade.

  • Posted by K T Cat

    The Fed just ended the game today. Why buy things when infinite numbers of them can be issued? The Money Fairy arrived and brought $300B with her and didn’t say a word about that being the last bit.

    With a profligate congress and amateur hour in the White House, is there any question but that this is just the beginning?

  • Posted by locococo

    Additionally, fed can sell all the treasury s yield-less assets, if larry agrees.

  • Posted by Twofish

    Terry: I’m intrigued by CURIOUS’ comments. Without any inside information, I have increasingly begun to believe that most WS types simply don’t want to be associated with Treasury, not to mention the public laundering of their taxes, nanny nationalities, etc.

    Speaking as a Wall Street type. The problem is that anytime anyone from Wall Street shows up in public, you get rotten apples and heaps of abuse thrown at you.

    Terry: What’s the deal here? Do guys on Wall street nobody wants their name associated with this crisis, because history shows it.

    Hardly. Everyone involved wants to help Treasury. The trouble is that once you get into the public eye, then if you just say or do anything even slightly off key, you get rotten eggs thrown at you, and at some point you really have to wonder if it’s worth it since you could be doing something equally useful outside the public eye.

    On the other hand, it’s probably better if the key people making the decisions aren’t Wall Street types. The good thing about Geithner is that he can make a decision without people constantly second guessing as to his motives.

  • Posted by locococo

    Additionally, they can also lower or eliminate the rate on bank s excess reserves thus lowering eff. federal funds rate into the negative “terroir”.

  • Posted by locococo

    If this falls short –why then not penalize the excess reserve hoardings?

    Just do it.

  • Posted by Cedric Regula

    curious”Some could argue it also gets us “that much closer” to a potential AAA downgrade.”

    Who needs a credit rating? We just stepped into the world of Star Trek, where money and credit are relics of the past. The Federation Reserve just doles out electronic attaboys to their Captains in Good Standing. They in turn hand out attaboys to their underlings. Attaboys are redeemable in food, wine, McMansions and Porsches.

  • Posted by Curious

    anyone here want to guess why the SEC/congress will likely eliminate or change the rules of mark to market?

    the true reason behind this?

  • Posted by MakeMeTreasurySecretary

    gillies: “give me armageddon any day, if the alternative is disneyland”

    I do not if it is just me but I will take Disneyland over Armageddon.

    An economist friend of mine who lived in a country with frequent devaluations (in the pre-euro era) had told me that after a devaluation he felt like he had a tooth extracted. Sure he was not happy that he had lost a tooth but given the state of the tooth and considering the alternative, he was happy to be done with it.

  • Posted by K T Cat


    Amen, brother! There are no limits at all. The Fed, in one day, agreed to buy almost as much as China bought all last year. They picked the number $300, but what difference would it have made had they said 400, 500, 600 … ?

    Without the need to worry about whether or not you can borrow the money you want to spend, why stop spending?

  • Posted by Cedric Regula

    curious: on mark to market

    I heard they did modify the rules already last november. Didn’t help enough.

    But a real reason for doing it would be fear of interest rate increases. That would push down mortgage paper further.

    So now we see that Ben will buy another 1.2T in debt ranging from treasuries to GSEs to car loans to old vacations paid on a credit card. All in the name of keeping interest rates down. But all these programs are buying old debt, and there is no guanantee that the proceeds are used for new borrowing. So to me that sounds like another stealth bank bailout. But if it walks like a duck…

  • Posted by Curious

    @ Cedric

    on mark to market. a shared consensus by myself and the author.

    “without the credit default swap market, there’s no way banks can report the true state of their assets – they’d all be in default of Basel II. That’s why the government will push through a measure that requires the suspension of mark-to-market accounting. Essentially, banks will be allowed to pretend they have far higher-quality loans than they actually do. AIG CANT COVER FOR THEM ANYMORE”.

  • Posted by Cedric Regula


    Ditto, CDS pretties everything up.

    The annoying thing is the USG is absorbing all the toxic stuff piecemeal, one at a time, in the reverse order of what the taxpayer would like, and in the end there will still be bad mortgages on the banks’ books, and they are securitized which means they are interest rate sensitive.

    This was a far worse idea than, say, burning our food supply to make ethanol, or even bringing democracy to the Middle East.

  • Posted by Curious

    still reading through notes from the UN economic team on hard dollar landing that should throw the world into a a possible depression for 2nd half of 09′. Very interesting, pretty much in line with a European anticipation group that has been spot on before guys like Roubini, etc.

    I’m not going to give financial advice. Guys like Brad @ the Council have stronger relationships that pass in and out of 68th n park.

  • Posted by yoda

    FED just minted $1.15Trillion dollar. how much did China and Japan lost from debasing dollar?

  • Posted by Cedric Regula


    Depends a lot on which movie is playing. The Japanese lost 2% in dollar currency value today, but bonds jumped up more than that. China loses nothing in currency as long as they stay pegged to the dollar, and don’t “spend” too much on the peg now that it got cheaper to do based on the drop in exports. This aso means they print less RMB for the local economy.

    Longer term, the US taxpayer owes it all anyway because the Fed is lending to the Treasury and someday the Treasury will re-cap the Fed to cover other bad collateral, so what’s to lose? Japan and China will just monetize any losses themselves in the name of keeping trade competitive.

  • Posted by Curious

    @ Cedric

    any thoughts we’ll see Geithner resignation before end of March?

    you always know something is IMPORTANT maybe in the cards,we’ve not heard from Brad all day…:)

  • Posted by Cedric Regula


    Maybe brad is interviewing for TG’s job?

    I’ve been thinking someone should arrest Bernanke for being a klepto, so I didn’t realize TG was in the hotseat.

  • Posted by don

    Nice, informative post, but this part: “so the US needs less external financing now than in the past. But it still needs some.”
    There you go again. The U.S. does not “need” foreign capital inflows, and their decline will contribute to a substantial fiscal stimulus through the effect on current account. You appear to be worried about ‘crowding out’ of private investment, but to my mind this is as mistaken as the notion that we need to borrow from abroad to fund stimulus. That would completely negate the effect of the stimulus on the U.S. economy and merely leave U.S. taxpayers burdened with the cost.

  • Posted by Michael

    Bernanke has a model he is following, and he made it public before he became Fed Chair: we shall repeat Japan’s experience with quantitative easing. The rest of us may think Ben is either crazy or stupid to want to reproduce Japan’s experience, but he honestly believes (and stated publically) that the only reason ZIRP and QE did never solved Japan’s problems was that it was implemented “too little and too late.” In a similar way, Greenspan had a model that he followed and which he made public before he became Fed Chair: he bragged that he’d love to see a deflationary crisis, because we now know we can lick it in the twinkle of an eye simply by dropping interest rates; he (and many others) believed that the only reason that the dropping of interest rates early in the Great Depression didn’t work was because it was implemented “too little and too late.”

    One thing should be crystal clear: There is no predictable limit to the amount of money printing and borrowing that the U.S. government is eagerly ready to engage in to try to prove our government can beat market forces at their own game and restore the status quo ante.

    Any currency value loss of the dollar is considered positive in their eyes because it boosts exports, and any resultant inflation is also good in the short term (it counters the dreaded deflation) and it’s “easily” stopped at will by “simply raising interest rates.”

    If the foreigners don’t want to buy our trillions of Treasuries, no problem, we’ll just buy them ourselves.

  • Posted by 90210

    The Federal Reserve (a privately owned corporation) which is as federal as Federal Express, and has zero reserves, because it creates money out of thin air and loans out to governments with interest to finance wars and bailout economies is stuck with the paper. It can’t get anyone to invest in long term notes, so it is buying them back, giving the illusion that the Fed is acting responsibly. Simultaneously, it is keeping interest rates at near zero rates which only exacerbates the problem. When long term corporate debt stops being issued, long term plans come to a halt.

  • Posted by WStroupe


    You document very well the asinine and gross arrogance of U.S. economic/financial leaders, starting especially with Greenspan, and the utterly shortsighted policies they conceive and enact as a result. They evidently see themselves virtually as gods. In several months’ time we’ll be talking right here in this blog about how the Fed’s efforts to mop up all the excess liquidity will be grossly failing, and how hyperinflation took root and absolutely ravaged the dollar.

    The formerly god-like Greenspan has, at length, been totally discredited, has he not? Yes. Well, Bernanke’s comeupance is not that far off.

  • Posted by HZ

    Maybe you could address the significance of buying long dated Treasuries in another blog post. Uncle Sam is doing what commercial banks have failed for a while: selling short term liabilities to buy long term assets. So what is the harm?
    Foreigners have to buy something with their dollars. If not long dated treasuries then bills. If not treasuries then corporate debts or mortgages: which is Fed would like to drive them to any way.
    Finance is a zero sum game, so the judge will be the real economy. Will our economy become more rational? A falling dollar does not seem to hurt. Fed would not want people to be too complacent about holding cash.

  • Posted by hagelstein

    please help me understand: The government borrows USD$, and then turns around and sells bonds? Is this the leverage which got us into this fking shtole in the first place?

  • Posted by hagelstein


  • Posted by david_in_ct


    Yes you are missing something. Chairman Bernanke has just told you (like he has been telling everyone all along) that in the end there will be no deflation. He is demonstrating for all to see that he can create as many fiat dollars as he chooses just by typing a few numbers into a computer (Note that this is very modern and green since no trees or ink need be sacrificed).
    So for everyone worrying whether or not China or anyone else is going to fund the trade deficit or the budget deficit the answer Ben is proposing is ‘not to worry’. We can print just as much as we like. So to all you guys who have gone down the mercantile path of printing lots of your own currency to keep your exchange rate low to keep your industries running in a beggar thy neighbor sort of way we salute you and tell you all your dollar reserves ain’t going to be worth one hell of a lot after all. Thanks for all the toys.
    Not to talk my book too much but Copper is going to be very sought after in terms of the US buck.

  • Posted by locococo

    Additionally, they could increase the number that they (for govies and pimco) at will.

    Additionally, one can additionally broaden the wide range of target liabilities to acquire with those newly $s (additional privately issued bonds, swaps, equity, bonuses, political party contibuts, why not oil / off shore accounts, chinese imports, housing units, fdic account, gold etf s, pm and treasuries iou s, 401k s etc).

    There are many tools in that kit.

  • Posted by K T Cat

    This move is not wrong because of the printing of money, it’s wrong because of what that money will buy. If we had rational, thrifty people in charge of the government purse, this would be a wonderful move. Instead we have Obama and Pelosi. Bernanke’s money goes straight to them. We are devaluing the dollar and handing the proceeds squeezed from all of us over to a pack of business incompetents.

  • Posted by Curious

    this post was one brad’s best to date.

    before the Fed policy meeting, the headline

    “bit more to worry about; foreign demand for long-term Treasuries has faded”

    signal Bernanke has no choice but crank up a massive Multi-trillion dollar printing experiment.

  • Posted by Cedric Regula

    Looks like Ben is saving us from oil deflation. That will be one feather in his cap!

  • Posted by jonathan

    A note to K T Cat: that’s not what the Fed does. Learn about it. They do the work, the buying, the selling, the printing and the “actual” government has next to nothing to do with it. This is not money for Congress to spend.

  • Posted by Ying


    Realistically, it doesn’t make sense for Chinese to buy long term treasury bond. On top of exchange rate loss ( if there will be 10 to 20 percent appreciation of yuan against dollar), there will be long term interest rate hike (long term expected high inflation). The double loss could easily devalue the long term treasury bond maybe up to 50%. Correct me if I am wrong.Devaluation road is going to be bumpy.

  • Posted by gillies

    so bernanke is just a card sharp who doesn’t even bother to hide that although he lost most rounds so far, he has a reserve pack in his back pocket and a machine at home that prints packs of cards and he can play five aces at once if he likes.

    what can the other players do except quietly get up from the table ?

  • Posted by K T Cat

    jonathan, who gets the money when you buy Treasuries?

  • Posted by gamma

    $3 trillion + in credit destruction in 2009
    $2 trillion in Fed printing / gov’t stimulus

    Net result is credit contraction. Deflation will win. As always they are behind the curve. By the time they ante up to $4 trillion it will be because bankruptices soared higher than anyone expected and credit contraction will be $5 trillion.

    Let’s not forget that the Fed makes money off of deflation as well as inflation. They created this mess for their own purposes. Roubini, Setser, Soros, Paulson (both of them), me, you – we all saw it coming 2 years ago. This orchestrated to transfer wealth.

    Wealth transfer in progress.

  • Posted by mjB

    Hyperinflation and the crash of the Keynesian model could be in the offing soon if the Chinese drastically draw down.


  • Posted by Wakefield skips

    yes we are in a lot of trouble

  • Posted by C. Michael Reilly

    re; previous comments, blog issue addressed by recent Roubini book “Crisis Economics” ;

    March 18, 2009 at 3:09 pm
    C. Michael Reilly responds:
    With foreigners buying fewer govies , sounds like Bernanke is looking to influence all the ‘safe haven’ , risk averse lemmings into long govies so the smart $ can invest it and raise inflation expectations beyond borderline pathologically low levels here. Timely post Brad. Thanks.

    March 18, 2009 at 3:40 pm
    C. Michael Reilly responds:
    continuation from previous post of 3:12pm mar 18 : ; oops I guess Uncle Sam IS the aforementioned ‘safe haven’ , risk averse lemming … in that case what is the cost to tax payers … or government credibility ? Why is Bernanke so concerned as to do this? Is this smart or … not?

    Current post; Roubini’s book “Crisis Economics” wraps up this issue nicely !

  • Posted by Mortgage Quote London

    Foreign interest will pick up again, but the US may find that it will be from investors they hadn’t previously regarded as worthwhile. Economic power is generally headed east.