See the following excerpt (on the next page of this posting), which came this afternoon, after this morning’s record trade deficit figures came out. Indirect bidders, mostly foreign institutions, continue to support the U.S. government and American consumer, both of whom are living beyond their means, as evidenced by the twin deficits (government and current account) on the one hand and the home-equity-financed spending spree on the other.
This government and consumer spending are the golden goose of the world economy. And if foreigners take away their bond bids then the goose gets sick. If the housing market comes down too much, the goose also gets sick. If the goose gets sick it can’t buy as much stuff from abroad. If it can’t buy as much stuff from abroad then foreign merchants feel pain. If foreign merchants feel pain their economies also feel pain. If foreign economies feel pain they can’t buy so many American dollars, stocks, bonds, etc. If they feel a *lot *of pain or sense the music stopping soon, they start selling American stocks, bonds, and dollars to bring money back home. If foreigners bring money back home at the same time as: (a) the American consumer is feeling pain and not spending, (b) corporate profits are taking a hit, (c) unemployment is rising, (d) tax revenues are going down due to economic slowdown, and (e) government spending is going up due to wars and continued mismanagement, then you have a recipe for some real problems up to and including a crash. And if we ever even get close to this type of scenario coming about then money will start moving in advance of these events, which of course will actually help bring the events to pass.
How soon could something like this happen? As soon as 2006, after Bubbles Greenspan is gone and so is the artificial support the dollar is getting as corporations take advantage of the Homeland Investment Act (part of last year’s American Jobs Creation Act). The HIA encourages U.S.-based companies to bring overseas profits back home to the U.S., but for about 80% of eligible corporations, the deadline for doing so is 12/31/05. This deadline is putting a bid under the dollar and dollar-denominated assets, as a premium is extracted from those poor souls who thought waited to the last minute or bet on a dollar slide to scrape a few points. Oops, time’s about up and it’s gonna cost to close those bets. But after they are closed, what do you think might happen? Where will the support be? Who will feed the golden goose? Cheers!
Nov. 10 (Bloomberg) — Treasuries surged after overseas investors, who hold about half of all U.S. government debt, bought a record amount of 10-year notes at an auction.
Bidders including foreign central banks purchased 55.6 percent of the $13 billion of 10-year notes sold, the most since the Treasury began releasing auction bidder-participation data in May 2003. The rally wiped out almost all of yesterday’s slump after an auction of five-year notes disappointed investors, and helped send Treasuries to a weekly gain.
Today’s record 55.6 percent participation rate by so-called indirect bidders including central banks compares with 21.1 percent of the $13 billion five-year note sale yesterday, and 29.9 percent of the $18 billion sale of three-year notes.
Overseas investors owned $2.06 trillion, or 50 percent, of the $4.1 trillion of tradeable Treasuries outstanding as of August, up from less than 40 percent three years ago.