U.S. Federal Reserve officials extended through the end of the year a program meant to drive down long-term interest rates and signaled that they were “prepared to take further action” if needed amid heightened worry about the economy’s performance.
By continuing the program, known as “Operation Twist,” the Fed will buy $267 billion in long-term Treasury bonds and notes while it sells short-term Treasurys. The program had been set to expire this month.
While most commentators proclaim that QE is a completely new phenomenon, we have in fact seen a version of it in the form of the Fed’s and Asia’s (especially China’s) purchases of US Treasuries/ currency pegs over the last decade or so.
Indeed, today, the Fed, China, and Japan collectively hold 61% of the $10 trillion of US debt held by “the public.” When you add in the additional $4.6 trillion in US debt held by “intragovernmental holdings” (basically the Federal Government buying Treasuries by raiding Social Security and other pension funds) you find that Asia and the Feds have monetized $10.7 trillion of the US’s total $14.6 debt (roughly 73%) over the last 20 years.
via QE Can’t Save the Day… We’ve Done a Version of It For Over 10 Years | ZeroHedge.
A key rate setter-for China’s central bank let slip – or was it a slip? – that Beijing aims to run down its portfolio of US debt as soon as safely possible.
“The incremental parts of our of our foreign reserve holdings should be invested in physical assets,” said Li Daokui at the World Economic Forum in the very rainy city of Dalian….”We would like to buy stakes in Boeing, Intel, and Apple, and maybe we should invest in these types of companies in a proactive way.”
via China to ‘liquidate’ US Treasuries, not dollars – Telegraph Blogs.
Why would a poor country with GDP per capita of $4000 and an emerging economy be investing in US Treasurys or blue chip stocks? Perhaps because repatriating funds would cause the yuan to rise to a more realistic level against the dollar and end China’s trade advantage.
This is in response to a question raised by Thomas Franklin:
Hi Colin,
….. My question is not just about the bond market although it is part of it but a reflection of the bigger picture globally with what is unfolding. With many governments facing rising debt levels and the Feds policy of financial stimulus, surely this is just delaying the inevitable of “Global Financial Meltdown” The USA and the dollar is a sinking ship, with the Fed losing the battle of bailing the ship out. So what do you think will replace the system we currently have?
Hi Thomas,
What we need and what we actually get may be vastly different.
Firstly, what we need:
What we will probably get is:
Hope that doesn’t sound to optimistic 🙂
Regards, Colin
