Foreigners own 46% of US treasury bonds. 2/3rds of all US dollars sits in foreign banks.

[ReiAyanami]

http://biz.yahoo.com/tm/030926/10728_2.html
as the nasdaq has dropped 100 pts this week and the dow 300

"Here's how international finance has been working in recent years and why this is significant. We pay foreign countries (mostly Asia) for their goods in dollars that the Fed pretty much prints at will. But we're too big a debtor and too big a customer for foreigners to really do much about this. Instead, they take those dollars and buy US Treasury bonds with them, so that interest rates stay artificially low enough that demand doesn't fall apart in the US, and so that the dollar doesn't collapse, which it would if they didn't buy US assets with the excess dollars.

This allows the US economy and demand to hold up so that foreigners can keep selling us their goods. Basically, we are buying foreign goods with money that foreigners turn around and lend us. The result is a record high current account and trade deficit and foreigners now own 46% of US Treasuries. For Asia, the policy helps fight deflation and leads to stronger economic growth, masking overcapacity problems. However, at some point, when Asian growth and inflation get strong enough (or perhaps inflationary pressures get too strong), then foreigners will stop buying as much US paper - and the dollar will slide, while the distortions caused by this intervention will begin to unravel. As the dollar slides, foreigners will scramble to get out of US paper and rates will rise, killing off any recovery."

my econ prof told me 2/3rd's of all US dollars actually sit in foreign banks because they back their currency with our currency since ours is so strong.

now they're owning 46% of the us treasuries, literally almost half our government now.
maybe when they reach 50% they can pull off a non-hostile takeover of our government... 😉

 

[ReiAyanami]

but yeah it is interesting how we give them our dollars for goods, then they lend us the dollars we gave them so we can buy more goods from them. no wonder us americans are always loaded up with so much debt.

 

[Dari]

you sound paranoid. they have such reserves for security reasons, to prop up their foreign-exchange balance, and to keep their respective currencies in check.

Like everything, it has its ups and downs.

THe irony of it all is that the more treasure notes they purchase, the lower our interest rates go down. That means, they are underwriting america's financial miracle, where the housing market is sizzling. THe foreigners are giving us lower interest rates. The downside is that it only prolongs the tough medicine America will have to take to reduce her debt. It also prolongs the foreigners' inevitable releasing of their currencies to market forces.

 

[glenn1]

However, at some point, when Asian growth and inflation get strong enough (or perhaps inflationary pressures get too strong), then foreigners will stop buying as much US paper - and the dollar will slide, while the distortions caused by this intervention will begin to unravel.

That is probably going to be a long, long, long, long time away. But you're basically correct, for the price of a sheet of paper or two that has "U.S. Treasury Bond" written on it the rest of the world sends us cars, electronics, everything you can imagine. To me, indefinitely trading paper for real, tangible goods is a pretty sweet deal if we can keep it going.

 

[tcsenter]

September 12, 2003

Foreigners May Not Have Liked the War, but They Financed It

by FLOYD NORRIS


The Bush administration is not very popular overseas, at least if you believe the opinion polls. But if money could talk, it would tell a different story.

For most of this year's second quarter, the United States was waging a war in Iraq, with help from the British and not very many others. There were demonstrations around the world against the war.

But guess who was financing it? The world was. Figures released this week showed that private foreign citizens bought an unprecedented $129 billion in United States government and agency securities. Official accounts, mostly central banks, added $43 billion more.

All told, foreigners bought almost 80 percent of the net increase in Treasury and agency debt during the quarter. They now own 38 percent of outstanding Treasuries, more than double the figure of a decade ago.

Those numbers came from the Federal Reserve this week, in its quarterly flow of funds report. That report tends to be ignored because it is late, voluminous and complicated. But the foreign aspect of it is extraordinarily important these days because the United States must attract so much capital from the rest of the world.

We need that capital because of the huge current account deficit this country is running. That deficit ? largely reflecting the trade deficit ? went above 5 percent of gross domestic product in the first quarter for the first time in history. The second-quarter number, when it is released Monday, is likely to be about the same.

Such deficits can be financed only by investment flows. If they are not large enough, then currency values must adjust. A few years ago, it was fashionable in some circles to argue that the growing current account deficit was a sign of American strength because it reflected just how attractive American investments were to foreigners.

That argument does not work now. In the late 1990's, most of the foreign money was going into investments that were a bet on the vibrancy of the American economy: corporate stocks and direct investment, meaning foreigners were buying companies or building plants.

A lot of those investments went bad when the bubble burst, reflecting the fact that foreigners often tend to come a bit late to parties. Someone has to buy at the top.

The really big overseas accumulations of American stocks started in 1999 and continued into 2001. The overseas investors did not turn into net sellers until the first quarter of this year, after stocks hit bottom and started to recover. In the second quarter, they bought $21 billion worth of shares, a big gain but less than a third of the amount they bought in early 2000, when the market was peaking.

The second-quarter surge in private purchases of Treasuries may reflect a bit of bubble buying as well, as plunging bond yields and rising prices attracted speculators. John Vail, senior strategist of Mizuho Securities USA, notes that Japanese investors appear to have sold Treasuries in July, as rates were rising and prices were falling.

But speculators aside, much of the foreign investment reflects the need for a place to park the dollars foreigners receive when they sell all those toys, textiles and Toyotas.

It's a nice situation while it lasts. We get cheap imports, which hold down inflation and enable consumers to buy more. The flood of foreign money helps to keep interest rates low while supporting the dollar. The war can be financed relatively cheaply at those low rates.

But borrowers may eventually need to pay attention to the views of the lenders. It would not be fun if foreigners began to invest the way they talk.

Copyright 2003 The New York Times Company

 

[tnitsuj]

What's wrong with foriegners buying US treasuries? Somebody is going to do it.

 

[sandorski]

It wouldn't take much to cause the Global Economic system to collapse. As long as everyone likes the status quo though, things will continue.

 

[Deleted member 4644]

Sounds like a pretty dangerous situation...

 

[ReiAyanami]

point is if they collect them all (100%) they would own the government literally...

we can't keep buying things with blank checks forever, hence unless a reversal is eventually reached we could end up in an economic disaster that rivals the great depression.

 

[dahunan]

Ever wonder why we don't attack Saudi Arabia?

Because they are HUGE investors in America.... I wonder what the number is?