2009 Economic Forecasts...what will happen, when?

[2inquisitive]

Billy T,

I think China has much more in short term (T-bills or the like) than only the 122 billion they bought in 4Q08. You did not quote the page 11 statement from the link I gave you. I.e. starting since June 2008 almost all of Chinese buying of Treasury paper was "short term." In June?, July, August and September (not part of 4Q09) the influx of FDI and the trade balance were much larger than in 4Q08 so I would expect that in 3Q08 that added several times 122 billion of short term paper. If I were to guess, and assume they held none before June 2008 (not very likely, but some of the older is maturing now) then they would still hold about half a trillion in short term paper (or about 25% of their total US Treasury holdings) at the end of 2008. Thus your statement that they only held 122 billion at the end of 2008 is not reasonable. -PROOF: It can only be true if at 31Aug08 they held none, but we know that is not the case as most of 3Q08 was short term buying and in 3Q08 they had more fresh funds to buy with than in 4Q08 when the crisis hit.

I found another source, from China, on the amount of T-bills held by China at the end of March, 2009. The 'study' you keep referring to is an article by a staff member and blogger at CFR. Many different "facts" can be found that differ significantly. I had read that China didn't purchase Treasuries in Jan. and Feb. in some articles, but that too was a mistake. Here is a short cut & paste from a newswire, but you have to have a subscription to read the whole article:

May 18, 2009 (China Knowledge) - China's holdings of U.S. Treasury bonds had hit a record high of US$767.9 billion by the end of March this year, increasing US$23.7 billion in March alone, according to a report released by the U.S. Treasury Department on Friday. The figure included US$576.7 billion in long-term bonds and US$191.2 billion in short-term bonds, which accounted for 24.9% of the total

http://www.chinaknowledge.com/Newswires/News_Detail.aspx?type=1&NewsID=23648
China has been purchasing only short-term treasuries this year, so it is likely they didn't hold too much over $122 billion t-bills at the end of 2008, possibly around $150 billion.
{Billy T: then they would still hold about half a trillion in short term paper (or about 25% of their total US Treasury holdings) at the end of 2008.} Your 25% estimate is correct, but how did you come up with China holding $2 trillion of US Treasuries?

Billy T comment: I.e. NOT EVEN TRYING TO SELL 10 YEAR PAPER TO THE PUBLIC ! (62.3% of May public offering is two year or less paper. 0% is 10 year bonds.)

Billy, short term treasuries are, and always have been, sold much more often than long term treasuries. For instance, the shortest term T-bills are auctioned weekly I believe, while 30 year bonds are only auctioned quartely, every three months.

 

[Billy T]

...The 'study' you keep referring to is an article by a staff member and blogger at CFR. Many different "facts" can be found that differ significantly. ...
Your 25% estimate is correct, but how did you come up with China holding $2 trillion of US Treasuries?

Yes, but his credibality is increased when you note CFR is the publisher of Foreign Affairs and as far as I can tell he is a "staff researcher" (not just a "member") on their payroll and this is not his "blog" but a CFR report! ; however, I agree it is very hard to know what China holds as they do not tell and at least the state banks are active in the secondary markets so even the US Treasury can only guess. You know I have been saying "China is loading its economic gun" for years. - They are not about to let out how much dry power (bonds) they have for it. I would not trust reports from Chinese sources as much as I would the CIA, my CFR source, or even Hsu, etc. who basically also must read tea leaves, but have less motive to distort than the Chinese sources may have.

To answer your question that is just "collective memory" from several sources I have read, but they are also just guessing.

...Billy, short term treasuries are, and always have been, sold much more often than long term treasuries. For instance, the shortest term T-bills are auctioned weekly I believe, while 30 year bonds are only auctioned quartely, every three months.

True, obviously a 3 or 6month bill must be rolled dozens of times more often that 10 or 30 year bonds; However, I think it quite unusual to see 61 BILLION of these half year or less bills offered at one time. To me that is just one more indication that it is getting harder to sell the longer term paper.

Also note I started posting along these lines, based on my own observations of the yield curve dynamics BEFORE I ever read or knew my link existed. The yield curve is public data that can not be slanted to serve some POV. I trust what it is telling me, but you may not agree with me on what that is. :shrug:

The US debt problem feeds on it self as interest rates rise. Here, for example that is expressed:

"...“Washington spending money is threatening the credit rating of the U.S. government,” said Peter Boockvar, the equity strategist at Miller Tabak & Co. in New York. “Everything is thrown out the window if we see a rise in interest rates.”

From Bloomberg a few minutes ago so just tacked on to this post in blue: http://www.bloomberg.com/apps/news?pid=20601087&sid=aUkx8XrL9_fU&refer=home

More: “Bear Stearns to Algebra I Means Lost Dollars in Trickle-Down” is title of Bloomberg article at:
http://www.bloomberg.com/apps/news?pid=20601109&sid=aQJzd0DkdWuQ&refer=home

It is about secondary fall out from highly paid workers being fired. I.e. the waitress who now gets little in tips or the yard man who is not needed as owner cuts his grass now etc. – None of this show up in the official unemployment data (nor, as you surely know, do the so discouraged they stopped looking for work.) but they have stopped buying in the stores too. – All this is really scary, but pretty much as I foresaw and posted about years ago. I really hate GWB as it seems that I was right about how damaging he and Republican "trickle down" economics were.

 

[2inquisitive]

Billy T,

True, obviously a 3 or 6month bill must be rolled dozens of times more often that 10 or 30 year bonds; However, I think it quite unusual to see 61 BILLION of these half year or less bills offered at one time. To me that is just one more indication that it is getting harder to sell the longer term paper.

The Treasury also sells T-bills that mature in mere days, less than a month. It is unusual to see such high amounts of treasuries offered, but certainly not unexpected. The Treasury must finance a $1.5 trillion budget shortfall this year, over 400% of 2008's deficit, plus the moneys loaned and spent on stimulus packages such as TARP. Goldman Sachs estimates the treasury must raise $3.2 trillion this fiscal year. The Fed announced in March that they would 'monetize' (print money) part of this debt, so of course it is going to be difficult to sell long term treasuries and the yields will increase. The reason the Fed is buying treasuries on the open market is to help decrease the interest on long term treasuries. The interest paid on treasury bonds has been increasing in the past few months, but is still below historical averages. Remember that when the equities market (stocks) crashed last year, the flight was to treasuries lowering the interest rates to unprecidented lows, even negative on some short term securities. The global economy is seen by many to be at near the bottom, so money is currently leaving the safehaven treasuries and back into equities. A combination of increased risk taking in the equities market for profits and the very real possibility of inflation returning in two or three years makes long term treasuries undesirable except for some pension funds, etc. that mandate safety over risk. Even China will keep a large percentage of their investments in long term treasuries as the returns are much better than with short term treasuries. After being stung with equities such as Blackstone and agencies such as Fannie and Freddie, it is better to lose a small amount due to inflation than huge amounts due to market swings.

 

[Billy T]

...The reason the Fed is buying treasuries on the open market is to help decrease the interest on long term treasuries. The interest paid on treasury bonds has been increasing in the past few months, but is still below historical averages. Remember that when the equities market (stocks) crashed last year, the flight was to treasuries lowering the interest rates to unprecidented lows, even negative on some short term securities. The global economy is seen by many to be at near the bottom, so money is currently leaving the safehaven treasuries and back into equities. A combination of increased risk taking in the equities market for profits and the very real possibility of inflation returning in two or three years makes long term treasuries undesirable except for some pension funds*, etc. that mandate safety over risk. Even China will** keep a large percentage of their investments in long term treasuries as the returns are much better than with short term treasuries. After being stung with equities such as Blackstone and agencies such as Fannie and Freddie, it is better to lose a small amount due to inflation than huge amounts due to market swings.

*Yes, I agree with all your facts, but not your predictions. Pension funds (and life insurance companies assuming no return of something like the "Spanish Flu") know what they need to pay out and when quite accurately, even 40 years into the future, so 30 year bonds are safe for them, (but I am sure what the now young pensioner can buy with the dollars he gets years from now will be a tiny fraction of what he was expecting. I.e. all the inflation risk is transferred to the pensioner.) I.e. it is not exactly that they "mandate safety over risk" - It is more that they don't give a sh-- what happens to bonds as they "obligation matched" the risk away.

** "will" - That is you prediction, but mine is quite different. If China is not buying long term bonds (for about a year now, I think we agree) but only short term bills and notes, that indicates they doubt that long term bonds are a good investment, does it not? If already holding an investment you think is losing real value, (-3.9% net in 2009 only thus far, not even including inflation loss. - See ref in my next post.) and it is easy to unload, why would you not do so***?
That is why I think my prediction is more likely to be accurate than yours.

***I bet Lula {Petrobras) is with loan in dollars, not RMB, valued at 10 billion. Probably most of it structured with payout as the oil goes to China. I.e. China has positioned itself to resemble a pension fund with 10 billion dollars of future payout obligations, so does not care if 10 billion of their longer term bonds go to hell. - Effectively they have been dumped on Brazil for oil which will very likely be back above $100/ barrel averaged over the collection period. I now understand better why China has agreed to drop dollar for trade settlements with several small trading partners, but not with Brazil, a good dumping ground for dollars. (In his visit to China last week, Lula did not even get an MOU for dropping the dollar in bi-lateral trade as most, including me, had expected he would!)

Those "communists", claiming to love the down trodden masses, often make the US capitalists look like kids playing with monopoly money, except when they deal with the US and EU capitalists. Then the communists learn how the big boys play. Blackstone etc. being cases showing this. Dealing with Lula, or some African leader is better than taking candy from a baby (victim does not even cry!). Perhaps Geither should trade the "toxic assets" to Nigeria for 30 years of oil supply?

I think China is in the process of getting rid of all it longer term bonds, except those that are matched to future fixed dollar obligation. - I.e. China is switching to "pension or insurance company" mode and ceasing to be an “investor", hoping for gains on long term treasuries. China also still does not wants to see the US collapse - they are not yet positioned to take advantage of that. Thus, they will not just dump their "not-yet-obligation-matched" long term bonds now. (That comes when their population is spending at least 90% of their income, not saving ~45%.)

The part of your post I made bold is certainly true, but I do not agree. I.e. see no reason to change my long standing prediction that this all ends in depression for US & EU, but admit DOW could be on the high side of 9000 first. I.e. the recession is not a V, all agree now and think it is a unusually wide U. I think it is more like:
L... If obama turns out to be a "miracle worker." (Each dot is a year, for ~5 years of stagflation, instead of my predicted depression before Halloween 2014.)
or
U\ If Obama is "only human" - Just a good POTUS who gets unjustly blamed for GWB and Republican "trickle down" results.

 

[Billy T]

Update on my post 49, showing yield curve still growing steeper:

Daily Treasury Yield Curve Rates
May 2009
Date ...........1 mo 3 mo 6 mo ...1 yr 2 yr 3 yr 5 yr 7 yr .....10 yr 20 yr 30 yr
05/01/09 ...0.06 0.16 0.31 ...0.49 0.92 1.39 2.03 2.72 ...3.21 4.14 4.09 ......30yr/1yr = 8.347
For rest of week of 1 thur 8 May see post 49 (too lazy to manually space apart all the lines)*
05/18/09 ...0.12 0.19 0.30 ...0.50 0.93 1.36 2.09 2.73 ...3.22 4.16 4.18
05/19/09 ...0.14 0.18 0.29 ...0.48 0.91 1.37 2.12 2.76 ...3.25 4.19 4.21
05/20/09 ...0.18 0.18 0.28 ...0.44 0.87 1.31 2.05 2.72 ...3.19 4.11 4.14
05/21/09 ...0.13 0.19 0.30 ...0.45 0.89 1.36 2.16 2.86 ...3.35 4.27 4.30
05/22/09 ...0.13 0.18 0.30 ...0.49 0.92 1.39 2.23 2.96 ...3.45 4.36 4.38 ......30yr/1yr = 8.939 (I wounder if anyone has made study of the correlation with unemployment rate?)

*for week of 11thru 15, open link at post 49.
Here is last friday's (05/22/09) TIP rates: 5yr=1.04% 7yr=1.32% 10yr=1.72% 20yr=2.33%
So for 5 years of inflation protection you pay (2.23-1.04) = 1.19% annually. For 10years, 1.73% and 20years of protection only 2.05% annually.
If anyone believes that the annual inflation rate will be this for any of these periods, I have a bridge in Brooklynn I will sell you cheap. Two weeks ago, form post 49, the TIP 5,7,10 & 20 years ratres were: 1.11% -- 1.38% -- 1.77% -- 2.46%.Note that ALL have decresed. That means that the price of TIPs is still rising, due to increasing demand, even with the current "deflation" but IMHO, not too late to still buy. As many will read what I posted below (in the Bloomberg original, of course, not my post) TIPs will jump up in price next week, at least prior to the new TIP auction on the 27th.

I am not the only one telling that you should not hold dollars now (I have been telling TIPSs are better for years) In addition to China, Yale's Swensen does now:

“…Treasury Inflation-Protected Securities, known as TIPS, pay a lower coupon than nominal Treasuries because investors receive an inflation adjustment to the principal to reflect the change in consumer prices. Regular Treasuries have lost 3.9 percent including interest payments this year, while TIPS have returned 3.6 percent*, according to Merrill Lynch & Co. bond indexes.
… Swensen {who managed Yale’s endowment since 1985, much better than Harvard’s was} said: “You have to think about the potential impact of monetary policy on markets over the next five or 10 or 15 years.” …” My POV for ~50 years, but fiscal policy and trade trends are also important. I never have an idea what stocks will do next year, but usually know what will happen in five years** and act accordingly. Why I got rich on only a simple salary as income. In fact, when young, I learned I am terrible at “market timing” so stopped trying. I never did it as I always knew that "day trading" is only for the egotistical insane but can cure them as ever trade has a loser and both pay the broker, (the only long term winner).
-----------------
*That modest (7.5% relative) gain is relative unimportant. What matters is that if you bought TIPs a few years ago when first I posted that you should, you missed the entire down slide in stocks.

**I.e. In 2014 the nominal price will be several times higher, but the value less than today. IRS will love to collect on your “capital gains.” :bawl:
But in 2010, God only knows.

Quote above from: http://www.bloomberg.com/apps/news?pid=20601087&sid=aAOqcHEHmdAA&refer=home
(This Bloomberg article is called: Yale’s Swensen Recommends TIPS to Hedge ‘Substantial Inflation’ )

 

[Billy T]

...The Treasury must finance a $1.5 trillion budget shortfall this year, over 400% of 2008's deficit, plus the moneys loaned and spent on stimulus packages such as TARP. Goldman Sachs estimates the treasury must raise $3.2 trillion this fiscal year. The Fed announced in March that they would 'monetize' (print money) part of this debt, so of course it is going to be difficult to sell long term treasuries and the yields will increase. ...

Yes, I agree, but note that the public (not to FED) offering does not include ANY bonds, despite the great need. Does this not also say loud and clear that China is not interested in buying bonds now? (and imply China is unloading what it owns when it can without breaking the market). - I.e. dumping* them on Southern Hemisphere nations for oil, minerals and food stock in long term contracts. See my post 64, especially footnote ***, in reply to you for more discussion of this.
-----------------
*Not literally "dumping" of course, but as discussed in footnote * of post 64 by "obligation offsetting" them as penssion plans still do to safely hold the Treasury's long term bonds.

 

[DubStyle]

I found another source, from China, on the amount of T-bills held by China at the end of March, 2009. The 'study' you keep referring to is an article by a staff member and blogger at CFR. Many different "facts" can be found that differ significantly. I had read that China didn't purchase Treasuries in Jan. and Feb. in some articles, but that too was a mistake. Here is a short cut & paste from a newswire, but you have to have a subscription to read the whole article:

Dr. Brad Setser of the CFR (formerly with RGEMonitor - the goup run by the now celebrity and pop economist Nouriel Roubini) is likely the foremost expert on international flow of funds regarding China and the make-up of their Fx reserve holdings. His research is cited by nearly every major publication out there when they report on the issue. While there is not a great deal of visability into China's purchases and holdings, Dr Setser's data is about as good as its going to get.

I tried to get BillyT to take at look at Setser's work over a year ago and I'm glad he's finally taken note. Even if you dont agree with his conclusions regarding policy or long term trends - anyone who's interested in this topic should be familiar with the data he collects and provides.

His publications can be found here:

http://www.cfr.org/bios/8937/brad_w_setser.html

His blog here:

http://blogs.cfr.org/setser/

 

[joepistole]

The one bullet The United States still has in its power is its ability to tax. Tax rates in The United States are still low...especially by historical standards and in comparison to its peers.

What is certian is that US tax rates are going to have to rise in the near future. That was cast when george II begain his reign of terror. These teabaggers should have stood up against thing like the Medicare Drug progarm which gave big pharam and healthcare insurers an blank check on the US Treasury. No we are all going to pay the price for that and other Republican giveaways and these same folks are going to blame Obama rather than themselves.

 

[Billy T]

...What is certian is that US tax rates are going to have to rise in the near future. ...

Especially the local real estate taxes on larger homes, but as they have fallen in value it will be by at least doubling the tax rate. People want the schools to remain open and the police / firemen to be paid a living wage.

Sign as long a term contract as you can for a retal unit would be my advice. Get out of that silly turkey you built out in suburbia, as your part of the American dream (soon to be a nightmare in the high cost energy era.), I.e. take your loss now, if a recent buyer.

...I tried to get BillyT to take at look at Setser's work over a year ago and I'm glad he's finally taken note. ...

I wish I had. I try to think independently but sure need good facts. (I like exchanges with Quad & 2inqusitive as they often get some for me.)

I am not a very good searcher, but just read a lot and Setser link was in one of the many financial related Emails I get. I opened it and saw he had same conclusion I had reached mainly by watching the yield curve and thinking. Hard to believe now, but a little more than a year ago, it was inverted! I never really understood that, but probably it was related to the pension funds and life insurance companies need for what I have in recent posts like 64 called "obligation matching." (The supply of 30 year bonds they needed may have been low as they were not issued for a while.)*

Thanks for the links. That first one will keep me busy for some time reading the links in it.
---------------
*BTW, too little long term debt by the government can also wreck a modern economy. - Something for the "pay off the debt crowd" to think about.

 

[Billy T]

Here are some selected quotes, noted in quick skim, from the sub links at: http://www.cfr.org/bios/8937/brad_w_setser.html plus a quick Billy T comment following each. Again, thanks to DubStyle for this main link.

“…The United States may have more to lose than its creditors if they sell American assets or stop accumulating them at their current pace. This gives creditors potential leverage over U.S. policy.” From: http://www.cfr.org/publication/17074
In posts, I called this “China loading the economic gun” more than 4 years ago.

“…The announcement of a large IMF loan {to a country} can increase the market value of {its} long-term bonds,… However, bondholders tend to take large losses if an IMF bailout fails and the country enters into widespread default – as Argentina demonstrated. The clear winners from a bailout are short-term creditors who can get out quickly …” From: http://www.cfr.org/content/publications/attachments/Setser_IPD_Debt_SDRM.pdf
Argentina five years ago / US five years hence? (If China will keep the IMF solvent.)

“…Holding the oil surplus in foreign currency increases the liquidity in the international financial system. Holding the funds in local currency creates a surplus of local liquidity in the domestic banking system. …” From: Oil and Global Adjustment (click on the link to open pdf file. Manyinteresting graphs here to. )
Obvious choice and how oil exporters helped China (and GWB) get the US “over a debt barrel.”

The dozen or more other links are at least 3 years old – perhaps I will look at them later.

 

[2inquisitive]

Billy T,

That is you prediction, but mine is quite different. If China is not buying long term bonds (for about a year now, I think we agree)

I certainly do not agree that China has not bought long term bonds for 'about a year' because the statement is patently false. Until about a year ago, China held almost no short term bonds. In the last few months, China has been adding many short term bills to its portfolio, but not at the exclusion of long term holdings. In Jan. China decreased their long term holdings slightly, but have added to them starting in late March.

but only short term bills and notes, that indicates they doubt that long term bonds are a good investment, does it not?

It depends on how you define "good investment". China is almost certain to lose money on their long term bonds due to inflation, but profit on the bonds themselves is not the reason they continue to hold them. (1) If China starts 'dumping' Treasuries on the market, they will lose much more of their investment than by holding them.
(2) The real reason China buys so many US Treasuries is to manipulate the yuan. It is the same reason Brazil recently started buying dollars again as the Real approached 2 per dollar. Neither country does it to 'help' the US, but instead to help their own economies. The dollar is the world's reserve currency and is a free-floating currency. By keeping the value of the yuan and real artifically low with respect to the international reserve currency, China supports their manufacturing exporters and Brazil supports both their commodity exports and their manufacturing exporters. Neither the yuan nor the Real are 'fully convertable' because they are not free-floating currencies. That is also the reason the 'trade in their own currencies' between China and Brazil is a joke, will never amount to a hill of beans.

I bet Lula {Petrobras) is with loan in dollars, not RMB,

Of course it is in dollars.

China has agreed to drop dollar for trade settlements with several small trading partners,

No, China agreed to do currency swaps with a few countries, not "drop the dollar for trade settlements". The US agreed earlier to do currency swaps with many countries, including Brazil, but not Argentina because of past defaults that have yet to be cleared up. Argentina was forced to negoiate with China because they couldn't get enough dollars in their current crisis.

I think China is in the process of getting rid of all it longer term bonds...

What you 'think' is not supported by facts. Here is a link directly to the US Treasury's stastics, from which the ChinaKnowledge link I gave earlier was taken:
http://www.treas.gov/tic/mfh.txt
Notice that in March 2008, China held a 490.6 billion in US Treasuries, while in March 2009 they held 767.9 in treasuries. They increased their total holdings by 277.3 billion during these 12 months. I don't know how much China held in short term bills a year ago, but they held a total of 191.2 billion at the end of March 2009. Even assuming China held 0 short terms in March 2008, they would still have increased their long terms by 86.1 billion during the year, not 'gotten rid' of any long terms. They are balancing their holdings by adding to the more liquid short terms. China was hugely over-exposed to long terms because of their currency manipulation practices. Notice also at the Treasury link that short terms make up about a quarter of the total outstanding treasuries. China has been putting their holdings in line with that percentage.

 

[Billy T]

Billy T, I certainly do not agree that China has not bought long term bonds for 'about a year' because the statement is patently false. Until about a year ago, China held almost no short term bonds. In the last few months, China has been adding many short term bills to its portfolio, but not at the exclusion of long term holdings. In Jan. China decreased their long term holdings slightly, but have added to them starting in late March.

Dr. Brad Setser, is widely recognized as one, if not the, expert on this and he states on page 11 of the just revised CFR report that China has only been buying short term paper since June 2008. He of course includes your source with several others and his own analysis to come to this conclusion. Your source clearly labels its data as:
" Estimated foreign holdings of U.S. Treasury marketable and non-marketable bills, bonds, and notes reported under the Treasury International Capital (TIC) reporting system are based on annual surveys of Foreign Holdings of U.S. Securities and on monthly data. ...”

Probably, or at least a good chance, the last annual survey collected data before June 2008 and did not reflect the change in China’s policy which Setser reports or I independently noticed reflected in the steepening of the yield curve.
I think Setser has no reason to “slant the data” as that would hurt his standing if later shown to be wrong. I cannot say the same for the US treasury’s TIC or reports that China may have given in their annual survey. This is admittedly a guessing game, but as Setser made the same guess as I did from different observations I tend to think he is correct and certainly not "patently false."

I agree both Brazil and China buy dollars to help their exports, not because they want to help the US over a rough period. I do not think that one can claim the dollar is not “manipulated” with the FED forcing short term (and long term if it could) interest rates to near zero. I think all countries manipulate their currencies when they see that as in their interest. Yes, all the long term bonds china still holds and has not offset with near identical time frame obligations will be a loss for China if the dollar collapse; however, a lot of other important things will be associated with that also. For example, depression in US and EU with demand of oil and other raw materials greatly reduced. The loss will be sharp and immediate, over in a couple of months at most. The benefit of oil and these materials at greatly reduced price will last IMHO more than a decade. I think when China’s population has been partially “Americanized” (I.e. spends at least 90% of their income instead of saves ~45%, then China will not need to sell much to US and EU, so even with the losses on their long term bonds, it is become a net gain in lower import costs in about a year. I have for years been saying this – never that that China was about to dump is US bonds on the market – only “dump” them in the sense of establish offsetting obligations that pay for the import of needed materials and energy under long term contracts with Southern Hemisphere countries.

…No, China agreed to do currency swaps with a few countries, not "drop the dollar for trade settlements". The US agreed earlier to do currency swaps with many countries, including Brazil, but not Argentina because of past defaults that have yet to be cleared up. Argentina was forced to negoiate with China because they couldn't get enough dollars in their current crisis.

All true, I think, but the existence of currency swaps does not mean that contracts cease to call for payments later in dollars. What I am speaking of does that. For example Brazil and Argentina no longer use the dollar in their contracts. As I explained earlier currency swap are nearly essential for this to work. For example China would need to have some Real to pay for its import of soy beans from a Brazilian firm, which would then sell the Yuan to Brazil’s central bank to get Real to pay the workers with. And conversely when Brazil firm is buying Chery cars, (BTW, Chery just announced a few days ago they will build them in Brazil, about 100,000/yr plant when complete, but less initially.)

… I don't know how much China held in short term bills a year ago, but they held a total of 191.2 billion at the end of March 2009. Even assuming China held 0 short terms in March 2008, they would still have increased their long terms by 86.1 billion during the year, not 'gotten rid' of any long terms. …

I did not see the 191.2 billion end of March figure there. I think their 86.1 billion added does not include any bonds (20 or 30 year paper) and even the notes are mainly less than 5 year maturities. This is what I understand Setser to be telling and what I infer form the yield curve dynamic. – I do agree that the interest levels are low by historical standards due to the flight to “safety” and now rising as that wanes some. To filler out this, I look at the steepness, not the level. Also consistent with my POV is fact Treasury is not even trying to sell bonds next week in one of its largest public offerings of notes and bills. I think only the FED is buying the new bonds now.

Thanks for the link.

 

[joepistole]

I don't think property taxes are going up substancially, because it would adversely affect an already troubled real estate market. However, I would expect employment taxes and income taxes to rise substancially for those with higher incomes. I would not be suprised to see a return to the 98 percent tax bracket.

 

[2inquisitive]

Billy T,

Dr. Brad Setser, is widely recognized as one, if not the, expert on this and he states on page 11 of the just revised CFR report that China has only been buying short term paper since June 2008. He of course includes your source with several others and his own analysis to come to this conclusion. Your source clearly labels its data as:
" Estimated foreign holdings of U.S. Treasury marketable and non-marketable bills, bonds, and notes reported under the Treasury International Capital (TIC) reporting system are based on annual surveys of Foreign Holdings of U.S. Securities and on monthly data. ...”

Billy, I believe you are taking one sentence of of context. Setser did not state China has only been buying only short term paper since June 2008. He was discussing the change from agencies to treasuries during this period. Here is a cut & paste:

The survey data nonetheless provides the basis for setting a lower limit on China’s U.S. holdings.
We know that China held $521.9 billion in long-term treasuries and another $13.2 billion in shortterm
treasuries in June 2008. The monthly Treasury International Capital (TIC) data since then suggests
that China has bought an additional $209 billion of treasuries, bringing its total holdings up to
$744 billion. The June 2008 survey indicates that China held $527.1 billion in long-term agencies
and another $16.9 billion in short-term agencies. It has since sold $45 billion, reducing its total holdings
of agencies to $499 billion. China also has $48 billion in bank deposits.
The June 2008 survey also indicates that China held $26.2 billion in long-term corporate bonds
and $99.5 billion in equities. The February TIC data indicates that since then it has bought $1 billion of corporate bonds and sold $0.4 billion of equities, bringing its holdings of corporate bonds to at
least $27 billion and its holdings of equities to $99 billion.
The $1.4 trillion in Chinese investment in the United States that can be identified in the U.S. data
is around 62 percent of China’s total estimated portfolio. That is likely to too low though, as it is likely
that the survey isn’t picking up all of China’s holdings—in particular its holdings of corporate
bonds. The authors consequently believe that the United States’ true share of China’s broad portfolio
is above 65 percent, and that the dollar’s share would be a bit higher than that.
Since June 2008, an unusually large share of China’s purchases have shown up in the monthly TIC
data, as China has been buying little other than Treasury bills.

You are only picking up on the bolded sentence. When Setser states that China has been buying little other than Treasury bills, I think he means to the exclusion of agency and corporate debt. "Treasury bills" is sometimes used informally to refer to all Treasuries. As further evidence of what I concluded, here is a cut & paste from Setser's blog, in his own words:

And there certainly is no shortage of evidence that China’s public complaints about the safety of US financial assets haven’t kept it from buying US Treasuries.

The TIC data for March was quite extraordinary. Foreign investors bought — gulp – over $100 billion of Treasuries in March: $55.3 billion in longer-term notes and another $47.9b in short-term bills. Indeed, over the 12ms of data – a period framed on one end by Bear’s collapse and at the other end by the stress tests, with Lehman’s failure punctuating the middle – foreign investors have bought a stunning $800 billion of Treasuries. $300 billion of longer-term bonds and $500 billion of short-term bills.

In March, China – according to the TIC data — bought $14.85b of longer-term bonds and $14.5 billion of bills. Talk about not putting your money where your mouth is. As a result, China’s Treasury portfolio – shown here disaggregated between bills and bonds – continues to rise.
http://blogs.cfr.org/setser/2009/05/

 

[Billy T]

I don't think property taxes are going up substancially, because it would adversely affect an already troubled real estate market. However, I would expect employment taxes and income taxes to rise substancially for those with higher incomes. I would not be suprised to see a return to the 98 percent tax bracket.

I can agree that the states which have an income tax (most do) will raise them. And personnel property states like VA will raise those taxes, forcing more yachts, etc. onto an already depressed market. I too would not be surprised to see state income taxes become more progressive, but 98% rate seems to me improbable.

These increases will not, I think, however even compensate for the reductions to zero rates of the "previously employed" and those with lower pay jobs now. Because of the progressive nature of the tax structure, someone working for 30% less may be paying 50% less in income taxes. I also think that in most districts the real estate tax provides at least half of all local government income, but I am just guessing here, even if individuals pay more in income tax than real-estate taxes as a lot of the real estate tax comes from businesses. I remember when GE's "Appliance Park East" came to Columbia MD that one facility helped reduce the tax rate in Howard County. It is closed now, and many other payers of corporate real estate taxes own property with decreasing value so will be paying less too.

SUMMARY: I think there must be a significant (~50%) increase in the real estate tax rates just to compensate for the ~30% loss of property values and local governments need to compensate for the lower average incomes, (greater than 10% if 10% have lost their jobs). This because the progressive rate table hits the government income harder than the salary reductions. - I.e. just to avoid LOSS of local gov. revenue, rates need to go up by about 50%, as their expenses are not decreasing - it is hard to cut teachers, policemen, fire fighter's salaries; their pension obligations are growing every year as ex-employees live longer; their social services costs are growing too as more unemployed need help. (I forget which western state had a law allowing parents to drop off their hungry kids. It failed to limit that right to long term local residents. Even some Florida mothers who could not feed their kids went there, so the law was quickly revised.) Times are rough for many and even rougher economical (percentage wise) for the states.

Yes it will adversely affect the local real estate market, just as personnel property tax increase will adversely affect the yacht market; but other than close the schools, the states and/or local governments have little choice, as I see it.

 

[joepistole]

As you know living in the US is kind of like going to the hospital emergency room....every time you turn around you are getting hit with a tax.

We are seeing now an increasing reliance on the federal government for state and local government financing. I think that is a trend that will become more prominent in the future. State and local governments will increasingly depend on the federal government for funding.

Personally, I would really like just one tax bill from one source. However I dont that is going to happen in the near future. But I do think state and local governments are going to look to Uncle Sam for money rather than raising local taxes....look at Arnold and California. Locals are not having any part of increasing local taxes.

 

[Billy T]

…Billy, I believe you are taking one sentence of context. Setser did not state China has only been buying only short term paper since June 2008. He was discussing the change from agencies to treasuries during this period. …

Seven sentences earlier than the sentence I quote, Setser did mention again that:
“The June 2008 survey indicates that China held $527.1 billion in long-term agencies and another $16.9 billion in short-term agencies. It has since sold $45 billion, reducing its total holdings of agencies to $499 billion.”
But that is not the point of the paragraph and his only mention in this long paragraph. He discussed this distaste for agency paper thoroughly earlier in other paragraphs, explaining it as a result of their experiences with Fanny and Freddy etc. He is only, IMHO, very briefly reminding us of this change in Chinese holding in this paragraph where ALL other sentences are related to the holdings of Treasury paper. Thus if either is picking out of context, I think you are. My quoted sentence is sort of the summary conclusion of the paragraph. Namely the same point he makes in other places that that like it distaste for agencies, China now (and since June 2008) has a distaste for Treasury bonds. – Exactly what I noted independently in the dynamics of the steepening yield curve. That is the main point of the paragraph

…You are only picking up on the bolded sentence. When Setser states that China has been buying little other than Treasury bills, I think he means to the exclusion of agency and corporate debt. "Treasury bills" is sometimes used informally to refer to all Treasuries. …

Bills, notes and bonds are terms used to distinguish increasing maturity time scales – Only the ignorant would use one term to refer to one, or both of the other two. Setser is NOT ignorant, but The expert. If someone well informed wants to collectively refer to both bills and notes, they can say “short term” and to all three, then they say “Treasury paper” or “Treasury issue” or simply “Treasuries.” I think Setser means exactly what he states, and PRECISELY that. He would never call or include bonds as “bills.” I see no reasons to assume what you do about his report statement.

As regards your “further proof” in comes from his blog, not a careful published report*:
He states: “over $100 billion of Treasuries in March: $55.3 billion in longer-term notes and another $47.9b in short-term bills.”
The 47.9b carefully described so no know it is Treasury paper with 1 year or less maturity.
The 55.3b carefully described so no know it is Treasury paper with maturities greater than one year and not more than 10.
Their sum, 103.2b is “over 100b” but not by much as China had stopped buying bonds, More than 10 year maturity issue.

He also states: “foreign investors have bought a stunning $800 billion of Treasuries. $300 billion of longer-term bonds and $500 billion of short-term bills.” Distinguishing in a blog only between “short term bills” and “long term bonds” totaling 800b of “Treasuries.” “Notes” are not specifically mentioned. There are two plausible interpretations of this. One is yours that he is including the notes in the 500b and not being as careful as he should have been, but this is blog, not a report written for people quite knowledgeable people. The other is that the foreigners either did not buy notes during this period (none offered?) or if they did, that their total purchases of “Treasuries” was greater than 800b. Without reading the context, but based on just your quote, I would agree that it is more likely he was just careless here. If that is the case, he should have said “short term paper, ” here and in the last part of your quote from the blog also.
--------------------
*I went to your link to his blog, but there are several different items there so did not see the “context” of your quotes. I did notice the following:
“…China has also changed which Treasuries it buys. It has done so in ways calculated to reduce its exposure to inflation or other problems in the United States. As recently as a year ago, China actively bought long-dated bonds,** seeking the extra yield they could bring compared to Treasury securities with short maturities, of which China bought virtually none. But in each month since November, China has been buying more Treasury bills, with a maturity of a year or less, than Treasuries with longer maturities. This gives China the option of cashing out its positions in a hurry, by not rolling over its investments into new Treasury bills as they come due should inflation in the United States start rising and make Treasury securities less attractive….”

**It was much less work for the administrators to “roll paper” every 25 years or so than every 6 months, but now they are scared they will be “hung out to dry” if they are with bonds when they crash in value so they are only buying bills now, even if that causes them 50 times as much work.

SUMMARY: Let’s not lose sight of the point in details and terminology. The point is China has stopped buying bonds and wants to be with bills dominating in its holding of treasury paper so it can get 100% out in less than a year without selling in a depressed bond market. I.e. As China has publicly stated, they are losing confidence in the dollar. Setser is saying this. I said this based on the yield curve dymamics (and predictred this would happen years ago).

Also note that as I have predicted, this blog article points to the now fact, that China is using reserves to buy real assets, instead of any treaury bonds, which only a year ago dominated the Chinese reserve purchases! I have been recently referring to this Chinese buying of needed supplies in long term contract as a way to get "offsetting obligations" which make China immune to damage by dollar collapse killing the long term bonds it still holds. I.e. transferring that risk to the supplyers of their needs.

 

[Billy T]

My second footnote in post 77:
"**It was much less work for the administrators to “roll paper” every 25 years or so than every 6 months, but now they are scared they will be “hung out to dry” if they are with bonds when they crash in value so they are only buying bills now, even if that causes them 50 times as much work."

It was to explain why China a year ago bought only (or at least mainly) long term bonds but had now switched to only bills, with maturity of one year, but it says much more than that:

In the US when some principal financial administrators lose billions by poor judgment, and now often that is tax payer’s money, they still get 10 to 50 million in bonuses on top of their outrageous salaries and options etc.

In China if they did this, and had some good political connections they might get only a few years in a re-education camp or prison.

Is something wrong here? I think so.

 

[2inquisitive]

Billy T,

Bills, notes and bonds are terms used to distinguish increasing maturity time scales – Only the ignorant would use one term to refer to one, or both of the other two. Setser is NOT ignorant, but The expert. If someone well informed wants to collectively refer to both bills and notes, they can say “short term” and to all three, then they say “Treasury paper” or “Treasury issue” or simply “Treasuries.” I think Setser means exactly what he states, and PRECISELY that. He would never call or include bonds as “bills.” I see no reasons to assume what you do about his report statement.

OK, I was giving Setser the benefit of the doubt, but if he did mean only short term bills, he was ignorant of the facts. China has not stopped buying bonds, evidenced by FACT, not speculation.

He states: “over $100 billion of Treasuries in March: $55.3 billion in longer-term notes and another $47.9b in short-term bills.”
The 47.9b carefully described so no know it is Treasury paper with 1 year or less maturity.
The 55.3b carefully described so no know it is Treasury paper with maturities greater than one year and not more than 10.
Their sum, 103.2b is “over 100b” but not by much as China had stopped buying bonds, More than 10 year maturity issue.

Pay attention Billy. Those figures were total foreign purchases, not China. You pretend the TIC data, which Setser quoted, does not exist. Here it is again, from the same paragraph. Perhaps your vision is impaired???
In March, China – according to the TIC data — bought $14.85b of longer-term bonds and $14.5 billion of bills. Talk about not putting your money where your mouth is. As a result, China’s Treasury portfolio – shown here disaggregated between bills and bonds – continues to rise.
--------------------

*I went to your link to his blog, but there are several different items there so did not see the “context” of your quotes.

The link I provided was only one page long. The heading of the article was “We hate you guys … but there is nothing much we can do” posted on May 17.

I did notice the following:
“…China has also changed which Treasuries it buys. It has done so in ways calculated to reduce its exposure to inflation or other problems in the United States. As recently as a year ago, China actively bought long-dated bonds,** seeking the extra yield they could bring compared to Treasury securities with short maturities, of which China bought virtually none. But in each month since November, China has been buying more Treasury bills, with a maturity of a year or less, than Treasuries with longer maturities. This gives China the option of cashing out its positions in a hurry, by not rolling over its investments into new Treasury bills as they come due should inflation in the United States start rising and make Treasury securities less attractive….”

Read more cosely Billy. That quote was from Keith Bradsher written in the New York Times on April 13, not Setser. It was reproduced all over the place, in many publications. Nowhere in it does it state that China 'has only bought short term bills since June'. He stated China had bought more short terms than long terms since Nov. to balance their portfolio. But in March at least, China did buy slightly more long terms than short terms. The data was not in when he wrote the article. BTW Billy, long term bonds are only auctioned every three months. The Treasury has not auctioned 20-year bonds since 1986, all Treasury bonds are 30-year. Bonds were auction in Feb. 2009 and again in May 2009, less than two weeks ago. The data for May has not been published yet, afaik. So, when THE EXPERT stated China bought 14.85b of longer term bonds in March, he was confusing notes with bonds, because no Treasury bonds were auctioned in March.

Setser is NOT ignorant, but The expert...I think Setser means exactly what he states, and PRECISELY that.

He may be The expert and not ignorant, but he is loose with his language and leaps to conclusions. I saw other mistaken conclusions he has made, but don't feel like going to the trouble of pointing them out.

 

[Billy T]

As usual, you are much better versed in the facts than I am:

...In March, China – according to the TIC data — bought $14.85b of longer-term bonds and $14.5 billion of bills....
Read more cosely Billy. That quote was from Keith Bradsher written in the New York Times on April 13, not Setser. ... The {Marcho9} data was not in when he wrote the article. ... The Treasury has not auctioned 20-year bonds since 1986, all Treasury bonds are 30-year. Bonds were auction in Feb. 2009 and again in May 2009, less than two weeks ago. The data for May has not been published yet, afaik. So, when THE EXPERT stated China bought 14.85b of longer term bonds in March, he was confusing notes with bonds, because no Treasury bonds were auctioned in March. ...

I knew Setser was quoting Brasher in his 21 May 09 blog I quoted but assumed he was in full agreement as his opening sentence of that blog post was:
"Keith Bradsher’s New York Times story on the recent evolution of China’s foreign portfolio gets — at least in my view — the story right. Of course, that may be because I was — rather obviously — a source for the story."
I did not know that Bradsher’s original NYT article was from 21April and written before the March buy of 14.85 billion bonds data was available. If I am not too confused still, I do agree it is at best just misleading for Setser to continue on 21 May (The March buy data was surely know by him then.) to say, via Bradsher quote that:
“ China has also changed which Treasuries it buys…. As recently as a year ago, China actively bought long-dated bonds,… But in each month since November, China has been buying more Treasury bills, with a maturity of a year or less, than Treasuries with longer maturities. ” It easily mislead me as I had come to pretty much the same conclusions by trying to understand why the yield curve keeps growing steeper. In view of the March buy data that 21 May Setser statement is slightly, but clearly false for March. I assume that Setser meant the total Bill buying since November was greater than bond buying.

I did not know all the 20 bonds had matured by 2006. I.e. only the 30year bonds exist now. I am quite sure that none were sold for at least one year, (longer I think) Do you know when that was? When will the last sold pre the suspension mature? And the first sold after it mature, is my real question. Do you think my guess that the reason why the yield curve was inverted not too long ago was due to a shortage of bonds that the pension plans and life insurance companies need to properly match their payout obligations? When was that curve inverted?

SUMMARY: As I have been predicting for years that China would reduce it holding of bonds and use reserves to buy real assets instead of Treasury promises, to minimize its losses when the US and EU either go into depression buy their foolishness or with China giving a push by dumping bonds, it is natural for me to believe Setser telling that they are not buying bonds since June 2008 and / or statements like the buying of bills have been greater than buying of bonds since November 2008. I do not go into the details and sources to the level you do. I am always glad when you correct my factual errors. Thanks.

That said, I still think that my predictions are basically correct and are starting to be realized. I.e. I firmly believe China is doing three financial things now to reduce the hurt when the dollar collapses:
(1) Shifting their holdings of US Treasury paper into bills they can just hold to maturity and need not sell in a depressed bond market, which will probably anticipate the collapse rather well with rapid steepening of the yield curve. (Why I watch it weekly now.)

(2) Shifting reserves to be more in long term delivery contracts for real assets (energy, mineral and food supplies) they know they will need although these contracts may no longer be technically called “reserves.” (I think they will do this in 2009 to at least 100 billion dollars worth, at the current rate of buying and of course the now lower commodity prices make this attractive too. For example some of the cheap oil China is now buying is filling their recently created strategic oil reserve. That may not technically be a financial reserve too, but it is a hell of a lot better use of financial reserves than buying bonds, IMHO.)

(3) Shifting dollar collapse risk to the sellers of these needed imports by “obligation matching” them with long term bonds China can still safely hold even thru a dollar collapse. This is very clever of China as it gets rid of the risk as if the bonds were sold but does not drive bonds prices down now. China does not want the dollar to collapse now, while it still needs US and EU to buy significant part of its GDP. It may want the dollar to collapse after it population is sending 90% of its income instead of saving ~45% to lower the cost of “spot market” imports, but 2 & 3 are interrelated and depend on how the long term contracts are structured.(Fixed dollar payments or at the then current market price.)

And of course China, is doing lots of quasi-financial things to help cope with the sudden drop in demand for its exports. Such as: 3% of GDP going into new heath care services and facilities, low cost loans (and totally forgiven if some conditions are met) for recent graduates to start their own businesses, allowing farmers to rent their land, form large efficient farms, building new cities, etc with proportional to GDP more stimulus spending than the US and much more quickly done. (No environmental studies to do first, just send the army in to evict people living in the way, or not wanting the farm flooded by the new dam, etc.)