Who Really Owns America Now?

 

They’re back…

After shying away from buying U.S. Treasuries, as the Federal Reserve was using its QE2 to do its own buying of government bonds, China increased its holdings of U.S. government debt for the first time in six months this April.

China holds about $1.149 trillion of long-term U.S. notes and bonds. Japan is the second largest holder of long-term U.S. debt, at just under $1.0 trillion dollars.

In total, foreign holdings of long-term U.S. Treasuries sit at $4.49 trillion (Source: Bloomberg).

Excuse my ponderings this morning…

While I don’t have a PhD in Economics, if I understand this right: foreigners own the majority of the U.S. debt. The Fed has been buying the same debt under its $600-billion QE2 program.

As we move from a national debt ceiling of $14.3 trillion to $17.0 trillion or $18.0 trillion, who will buy that extra debt? There seems to be only two buyers in the marketplace, foreigners and the Federal Reserve (the latter, only if it starts QE3).

At what point do China and Japan say, “Thank you, but we have enough U.S. debt on our books?” And who will ultimately be smarter? Will the U.S. succeed in keeping interest rates low, bringing in inflation and paying foreigners back with devalued U.S. dollars?

Or will China and Japan succeed in demanding higher interest rates on U.S. debt, while they debase the U.S. dollar as the world’s reserve currency?

In my view, the remainder of this decade will be a nail-biter…a real prelude to America’s future. And I wouldn’t want to miss it for anything.

If we go back through history, when we see countries in the past exposed to great dependence on foreign investment, the debtor nation has eventually faced sovereign debt problems and high inflation. Do we really think the U.S. will escape the same fate?

Michael’s Personal Notes:

Look at just how pathetic things have become in the housing market…

Sales of existing homes in the U.S. (re-sales) fell in May to their lowest level in six months. In May, 31% of all re-sales were “distressed” homes. In that same month, 30% of all re-sales were cash transactions. The median price of a resale home in the U.S. fell 4.6% from May 2010 to May 2011 (Source of all data: National Association of Realtors).

The banks have pulled the lending strings so tight that one out of three home purchases is in cash. (What a difference from 2006!) The government has not been successful at getting banks to increase lending in the housing sector. Too many distressed properties overhang the housing market.

How can the economy possibly recover under a scenario where the housing market…

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