MIKE

by Bud Conrad
October 17, 2011
Casey Research

Foreign central banks buy US Treasury and Agency debt through accounts at the Federal Reserve, where it is held in custody. Without these central banks buying our debt, the US federal government would have to find a new source of funds or the result could be higher interest rates. Looking at the data on a monthly basis (and then multiplied by 12 to give the annual rate), here is the dramatic picture of how foreign central-bank purchases of our debt have shifted, from buying $500 billion to selling off $1 trillion. At this rate of selling over several months, interest rates would go higher – if other things were equal. Of course, things are not equal because the Fed has been forcing rates lower with its massive QE2 and other programs. QE 2 was $600 billion over nine months, or an annualized rate of $800 billion per year. Since foreigners are selling off our government debt, Fed purchases of government debt are even more necessary.

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Here are the data on the amount of Treasuries purchased in the last quarter of the year at an annualized rate: Foreigners have decreased their holdings for the first time since 2007.

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Here’s another chart worth considering. This is a comparison to the ten-year Treasury, with the purchases of Treasuries inverted.

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In my latest article in The Casey Report on interest rates, I discuss the above chart and cover the broader issues driving interest rates.

What could be the cause of all this? The Senate passed a controversial bill that threatens to punish China for “currency manipulation” which will bring mandatory tariffs. China’s opposition to the Senate action could be the power behind the big shift in direction of these custody holdings. In an election year, government action against Chinese imports may be seen as supportive for US jobs, thus garnering votes. But unintended consequences of decreasing liquidity in the credit markets will put pressure on financial markets. The movement shown in these charts could be the result of China’s reaction to some of those anticipated policies. We can’t tell what country is doing the selling until two months have gone by and the TIC data are published. In some senses, it doesn’t matter which country is behind the shift. If rates begin to rise rapidly, even in the face of continued Fed manipulation, it could call into question confidence in the Fed’s ability to keep supporting the economy. The rate on the ten-year Treasuries jumped from 1.8% to 2.2% in the last week. Foreign selling of this magnitude is dangerous for the dollar, and it could be very bad for US interest rates.

[Whether this shift is temporary or a long-term reversal remains to be seen – but the end of the US dollar as the world’s reserve currency is all but certain. How can one prepare for such a life-changing move? Listen to the audio recordings of the recently held Casey Research/Sprott Summit, When Money Dies, to gain insights and actionable advice from experts including Adam Fergusson and Doug Casey on how you can not just survive what’s coming, but thrive. Order your set today.]

Additional Links and Reads

Banking Corporatism in 1912 (Ludwig von Mises Institute)

The Mises Institute dug up a great cartoon from 1912, representing what would happen to the US with the creation of a central bank. The picture says it all. That’s essentially what did happen.

Kinder Morgan to Buy El Paso for $21.1 Billion (Bloomberg)

In the biggest energy transaction of the year thus far, Kinder Morgan purchased El Paso Corp. to form the country’s largest national gas pipeline network. The natural gas market is an interesting beast. On the one hand, natural gas prices are dirt cheap. On the other, they can’t say low forever, but as Doug Casey says just because something is inevitable doesn’t mean that it’s imminent. There are some who have given up on investing in natural gas, while others are willing to put big bucks into it.

What I find interesting about the whole field is that involves so much hard science. Whether the general economy will go up or down is the realm of economics – not exactly a science. And of course, the economy will affect oil and gas prices, but natural gas requires making estimates of scientific facts. How much gas is left in the ground? What are the well decline rates? How damaging are fracking chemicals? While in economics we can argue back and forth without getting anywhere, these questions will have clear answers in the future. Someone will be right, and someone will be wrong.

Seven in Ten College Grads Are Employed Full Time for Employer (Gallup)

The second table of results from this poll, copied below, showed some particularly noteworthy findings which I’ve discussed before.  This table represents only workers and the unemployed who are searching for a job. At the top of the unemployment pile are workers aged 18 to 29 with 14% unemployment and 30% underemployment. That’s pretty crazy – only 56% are working full time. And of those 56%, how many do you think actually have a good, career-track job versus something like flipping burgers?

This relates to today’s intro. If one graduated college in 1998, one could get a job at Goldman Sachs. Graduate ten years later, and one will be lucky to find a position as an assistant accounting clerk with the exact same qualifications.

Read the entire article HERE.

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