Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
A Simple Way to Preserve Your Wealth Amid Uncertainty - 11th Aug 20
Precious Metals Complex Impulse Move : Where Is next Resistance? - 11th Aug 20
Gold Miners Junior Stcks Buying Spree - 11th Aug 20
Has the Fed Let the Inflation Genie Out of the Bottle? - 10th Aug 20
The Strange Food Trend That’s Making Investors Rich - 10th Aug 20
Supply & Demand For Money – The End of Inflation? - 10th Aug 20
Revisiting Our Silver and Gold Predictions – Get Ready For Higher Prices - 10th Aug 20
Storm Clouds Are Gathering for a Major Stock and Commodity Markets Downturn - 10th Aug 20
A 90-Year-Old Stock Market Investment Insight That's Relevant in 2020 - 10th Aug 20
Debt and Dollar Collapse Leading to Potential Stock Market Melt-Up, - 10th Aug 20
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Did The Fed Pay “Face” For $187.53 Billion Chinese Owned Toxic Assets?

Politics / Credit Crisis Bailouts Mar 01, 2010 - 01:23 AM GMT

By: Andrew_Butter

Politics

Best Financial Markets Analysis ArticleTwo pieces of disturbing news on the wires this week:

1:  The Chinese are NOT buying US debt anymore.

2: The Chinese ARE buying US debt (except they are buying it through intermediaries).


http://news.smh.com.au/..
 
And then there is always the fear that China might dump $700 billion or so of US Treasuries and so yields will go through the roof.

http://www.moneyweek.com/..

If I had a dirty mind, (which of course I do not), I might have suggested China was gaming the system, pushing up the yield before the auctions, so they can buy cheap.

Actually according to Simon Johnson, a former IMF chief economist, that $700 billion is more like $1.2 trillion; but a hundred billion here and a hundred billion there, who’s counting? And who’s counting how much of the Non-Government debt, much of which is now toxic, is owned by foreigners?

Of course there is not much chance of anyone dumping that at the moment because no one is buying…apart from the Fed. Or perhaps some of the $1.25 trillion of “legacy assets” the Fed just bought, was a sop to the all powerful Chinese, no one knows if the Fed paid “face” for that stuff, or even who it bought it from.

If I had a really dirty mind, (which of course I do not), I might suspect that the Fed DID pay “face” and it did buy some of that “melamine tainted milk” from America’s “Most Favoured Customers (for US debt)” to encourage them to keep buying Treasuries.

Now that would be a conspiracy theory that would make the 100 cents on the dollar paid out to Goldman Sachs et al at on those CDS from AIG; look like a rounding error.

But then no one will ever know, because unlike most US Government or related “private” institutions; the Fed doesn’t have to give out those sorts of details.

“Who’s counting” is the operative word, the “estimates” from the Treasury (note the word “estimates”) don’t jive with the Bureau of Economic Analysis (BEA) numbers, but either way they are big numbers.

According to the Treasury as of December 2009 China owned $894.8 billion of US Treasures out of $3.689 trillion that “foreign” governments own. It’s not completely clear how much of the remainder is owed by governments or individual foreigners, nor is it clear how much non-Treasury securities foreigners own, or their propensity to dump them.

The BEA has a table called “U.S. International Transactions Accounts Data” which goes from QI 1960 up to QIII 2009 which shows the debits and credits of international transactions in both “US Treasury Securities” and  “U.S. securities other than U.S. Treasury securities”.

Confusingly there are two lines for “US Treasury Securities” (Line 58 and Line 65) and there is no explanation that I could find for why that is.

But if you add up those two lines going back to 1960 and allow something for the outstanding US Securities in 1960 (pro-rata from the National Debt at that time), you get to a total of $3.724 trillion which is pretty much equal to the “estimate” (note the word “estimate”) put out by the Treasury ($3.689 trillion).

So I suppose it’s correct to add those two lines together, anyway this is a summary of what the BEA table shows:

To avoid confusion I called the “U.S. securities other than U.S. Treasury securities” by the name “Toxic” and on the area chart the total amount outstanding of that stuff is in a nice putrid green colour (total in QIII 2009 added up to $4.64 trillion).

My reaction to that chart is as follows:

1: If China owns somewhere between $700 billion and $1.2 trillion of US Treasuries, perhaps they own an equivalent amount of the toxic stuff? I remember hearing a number of about $500 billion floating around, that doesn’t sound unreasonable.

2: If I was China, and the US was relying on me to put some of the $400 billion surplus that I made in 2009 into “safe” US Treasuries (rather than for example using it to build ghost cities in Mongolia or to fund property speculation in Guangdong Province), I might just twist a few arms, and I might just get that arrogant prick Geithner to Kowtow too.

3: Notice how since about 1993 the purchases of “Toxic” and “Non Toxic” seem to go in waves (I smoothed those lines by showing the one-year moving average), and that when purchases of “toxic” was up, purchases of “”non-toxic” was down etc.

That’s interesting.

Could it be that when the shadow banks were manufacturing the melamine tainted stuff and shovelling it down the throats of the dumb foreigners, that helped the spendthrift US Government out by (a) effectively (temporarily) cancelling out the current account deficit (b) providing liquidity in USA that didn’t come from the Fed (c) and from that increasing tax revenues so the amount of debt that the government had to issue was reduced.

Sound’s plausible, and it could explain why the Fed and all the other myriad of regulators were quite relaxed about what was going on – it made them look good.

Why increase public debt to raise the $3 trillion dollars (or more) that Joseph Stiglitz (and others) say the God-Inspired crusade to chase phantoms around Tora Bora and to search for WMD, will end up costing; when you can get the private sector to do it?

Of course the problem with holding the coat of the shadow banks whilst they sell container loads of the financial equivalent of melamine tainted milk to dumb foreigners, is that at some point “the customers” ask for their money back.

And if you are in no position to negotiate, stuck between a rock and a hard place with two options (a) you can inflate away your debts and the debts run up by the shadow banks, in which case no one will buy your Treasuries (and forget about any of those AAA rated Made In America With Pride Synthetic Collateralized Debt Obligations), or (b) you can kiss posterior.

Well you might just decide to kiss posterior.

Since the Big Surprise realization that the valuations of all the toxic junk that remained on the books of US banks and Fannie and Freddie were indeed, as the International Valuation Standards Committee had pointed out in July 2003 “hopelessly flawed and bound to be misleading” (i.e. just plain wrong), US has “paid back” $187.53 billion worth of toxic stuff (according to BEA).

Perhaps that was sold in the “market-place”?

But err…there was only one market-place, the Fed.

 Of course no one knows how much the Fed was paying, or who they bought that $1.25 trillion of toxic junk from, but if I was China, and I was selling, I would have asked “face”, and the threat would have been “well sweetheart, if you want any more of my money, that’s the price you are going to have to pay”.

Perhaps the reality about the yield on the 10-Year and 30-Year is that it’s going to be “Made in China” these days, like just about everything else in America.

By Andrew Butter

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe; currently writing a book about BubbleOmics. Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2010 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Andrew Butter Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules