Supply of U.S. Dollars Overseas is Shrinking Says China's Central Bank

It helps to read global newspapers because according to Shanghai Daily:

It is getting harder for governments to buy United States Treasuries because the US's shrinking current-account gap is reducing supply of dollars overseas, a Chinese central bank official said yesterday.

Oops! Fewer U.S. dollars to buy up U.S. debt?

Firstly a current-account deficit is a fancy way of saying our trade deficit is pathetic and our debt balance is out of control.

$\mbox{Current account } = \mbox{ Balance of trade } \\ \mbox{ }+ \mbox{ Net factor income from abroad } \\ \mbox{ }+ \mbox{ Net unilateral transfers from abroad} \\$

So, what this means, since the U.S. has been selling Treasuries to finance an unsustainable debt level, all the while not addressing the trade deficit. So, (believe this or not in spite of Bernanke's personal dollar printing press) foreign holdings of U.S. dollars are drying up...because they already spent them on buying up U.S. Treasuries.

Tyler Durden of Zero Hedge takes it from here and explains further how this works:

In a nutshell, in printing trillions of assorted securities, the Treasury has soaked up the world’s dollars, which due to US banks not lending, is sitting and collecting dust in the form of bank excess reserves. These excess reserves can not be used to buy Treasuries and MBS as that would be literal monetization (as opposed to the figurative one which is what QE has been). And the world is running out of dollars with which to buy Treasuries.

Durden asks the next question of will this force foreign nations to buy more U.S. dollars and thus increase it's value? Durden says not necessarily.

It appears even if this is so, U.S. Treasuries are being issued like bullets, causing a "snake eating it's tail" sort of circular problem with dollar valuation.

What's even more interesting, beyond the fact we at EP have noted China's slowdown in buying U.S. treasuries is:

China has been selling mortgage backed securities almost as fast as PIMCO, it has not been buying treasuries: China’s Treasury holdings have been flat at exactly \$800 billion since May 2009. In the lesser of two maturity evils (the instantaneous, dollar bill, and the long-dated, the 30 Year) China has followed in the footsteps of so many millions of High Frequency Traders opting for that which can be liquidated instantaneously.

China is buying up MBSes? But note the ability to dump immediately mortgage backed securities. Ut oh, immediately is the key phrase.

Back to the original China Central bank statement:

"The United States cannot force foreign governments to increase their holdings of Treasuries," Zhu said, according to an audio recording of his remarks. "Double the holdings? It is definitely impossible."

Double the holdings...is this true to balance the current account?

China already has \$2.3 trillion in U.S. Treasuries.

Now here's a scary fact. China is expected to be 60% of global GDP, an event which hasn't happened since the immediate aftermath of WWII. Guess which nation accomplished that feat? The U.S.A.

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Mortgages

Here is a modest proposal: Let the Fed buy up mortgages from Fannie and Freddie, and reset the interest rate based on the rate for the 10-year note plus perhaps a point. Last year, Uncle Ben was reminding evertone that, if held to maturity, these securities were perfectly okay. That was before unemployment went to 10%+. Still, a rate under 5% (reset, not a refinance) would prevent many foreclosures by making mortgages affordable AND provide real economic stimulus for the middle class. Maturity would not change, so the Fed would not face a 30-year risk. Yes, this is a form of monetizing debt, but why should not the American middle class get the benefit of the Fed's largesse, since the banks apparntly have no use for it. Hell, at current rates, the bankers might even want some of the action.
Frank T.

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Frank T.