Friday, May 29, 2009
Keep yer britches on: Nobody's replacing the dollar standard (yet)
Warning signs abound. Earlier this month, the Treasury discovered that demand had significantly decreased for its long-term bonds. In order to get buyers at its regular auction � the device by which the United States runs on deficit spending � it had to hike the interest rates it pays the bondholders. It signaled a lack of confidence in America's ability to sustain its debt expansion, which has the effect of worsening it through heavier debt service payments on the bonds they managed to sell.Now to be fair, Ed explains back on HotAir that "I allowed my imagination to run" and "I like to engage in a little speculative thinking," and that's great. I suppose I've done some of that on this blog. �But it's worth kicking the tires on this idea to understand what happened and why.
That reinforcing cycle of cascading debt has analysts worried enough to openly discuss downgrading U.S. debt. Financial Times reported this week that Standard and Poor has already done that for Great Britain's foreign debt, issuing a �negative� rating that will require more generous interest terms in order to sell bonds in international markets. The same kind of deficit spending in the United States will eventually trigger a re-evaluation of the U.S. credit, as the United States and United Kingdom face similar debt spirals with no end in sight.
Looking at the 12m change actually understates the swing in central bank demand. In the first quarter of 09, the outstanding stock of longer-term Treasuries rose by $278 billion. Central banks � according to the Treasury data � only bought $25 billion of longer-term Treasuries (all in March, and likely mostly short-term notes). China only bought $15 billion (all in March). Over that time period, central banks bought $85 billion in short-term Treasury bills, including $32 billion from China.
Labels: banking, economics, Federal Reserve