Foreign holders of US Treasuries - Feb 2009

Here is a list derived from the US Treasury's data at the above link(in billions):

	Feb
Country	2009
	------
China, Mainland	744.2
Japan	661.9
Carib Bnkng Ctrs	189.1
Oil Exporters	181.7
Brazil	130.8
Russia	130.1
United Kingdom	129.1
Luxembourg	92.3
Hong Kong	76.3
Taiwan	72.6
Switzerland	68.2
Germany	56.6
Ireland	54.5
Thailand	39.7
Singapore	39.4
Mexico	37.9
India	34.6
Korea	33.3
Turkey	32.4
Norway	21.1
Egypt	19.1
Israel	17.4
France	16.8
Italy	16.5
Netherlands	16.1
Chile	15.2
Belgium	14.5
Sweden	12.7
Philippines	12.6
Colombia	11.4
Canada	10.9
All Other	173.4
Grand Total	3162

It's fairly remarkable how heavily the holdings are concentrated in a few countries, while other countries such as Germany, France, and Canada with large economies have relatively trivial holdings of US Treasuries.

US national debt shrank during the first half of 2007

According to a Bloomberg report today,

"the Treasury Department sold less securities from January through June than matured, the first time that has happened since 2000...the fiscal outlook is so good that investors and strategists are beginning to handicap which maturities the government may stop selling or even buy back for the first time in five years."

This is in spite of continued military spending in Iraq. The Bloomberg piece also noted that

"The government has reduced the sizes of its auctions of two-, five- and 10-year notes to avoid letting cash pile up for the past two years. Ten-year notes were cut to $21 billion from $23 billion a quarter in 2005. Five-year notes, sold monthly, were reduced to $13 billion from $15 billion. Quarterly three- year note sales were suspended in May."

Also, "The deficit as a percentage of gross domestic product narrowed to 1.9 percent in 2006 from 3.5 percent in 2004"...

Conveniently, "The drop in supply comes just as international investors, owners of more than half of all Treasuries, slow their purchases. They bought a net $16.2 billion a month on average in the first four months of this year, compared with $28.2 billion a month in 2005."

It would appear that the US economy is experiencing a virtuous cycle. The fact that the US is needing to borrow less at the same time that foreign investors have decided that they wish to loan the US less is striking. Should the US reduce its spending in Iraq over the next year, as it appears likely to do, there should be even more improvement in the budget deficit.

China and US debt

According to Bloomberg,

"Chinese investors sold more U.S. Treasury securities in April than any time in at least seven years...China sold a net $5.8 billion of Treasuries, the first drop in holdings since October 2005...the nation held $414 billion of the $4.4 trillion of marketable Treasuries in April, according to today's report."

So China holds a little under 10% of marketable Treasuries...I don't see that as being a worrisome fact. As the Bloomberg report notes, "Chinese officials have said they have no intention of doing anything that would devalue their holdings." In fact, as an owner of so much of the float, the Chinese government would have a difficult time getting rid of a major portion of their holdings without pushing prices down significantly. So really you could look at China as an ally of the US Treasury.

The political implications of this are important to consider; in spite of occasional saber-rattling, China and the US need each other to succeed. China is a nation with no history of democratic rule, and until recently primarily negative experience with Western capitalism. The twentieth century was a period of extreme political and economic instability for China, to say the least. So Chinese leaders and the country's people as a group are learning as they go along in managing a capitalist economy. It seems that ideally China would make a political transition like that of South Korea, which has shifted from dictatorship to an electoral democracy.

From the US perspective, China is at least moving toward a more open economic system; unlike Russia, which seems to be reverting to a kleptocratic oligarchy. Given that the US has developed deep economic ties to China, the US has a strong interest in improving its political relations with China.

Japan and the fertility trap-a worst case scenario?

The way I understand how a negative scenario for population dynamics could play out in Japan is as follows:

Japan has a large segment of its population that is approaching retirement. When all of those people retire, they expected to be supported by the working population which is now far too small to support the large number of retired persons. Of course, theoretically those retirees should have some significant savings since we've been informed for years that the Japanese are great savers. So the burden of supporting a large retired population with a small labor force might be delayed for a few years. On the other hand, the use of savings by the retirees forms a wave of dis-investment that could torpedo efforts to offset the shrinkage of the workforce with robotic or mechanized production(of which much has been made in the press).

Political and social division ensue. Leaving aside the options the Japanese government has for handling that situation, pretty soon thereafter members of that retired group start dying. In 2006, according to PRB.org's World Population Datasheet, there were 9 births for every 8 deaths in Japan. When the retirees start dying off, that ratio reverses and could go fairly high in the other direction, say 12 people dying for every 8 born. So massive population shrinkage ensues.

Since the population is shrinking, domestic demand naturally is shrinking as well, and therefore Japan becomes even more dependent on exports for positive GDP growth. In reality, once the ratio of births to deaths goes much below 1.0, positive GDP growth is not possible. The shrinkage in domestic demand will be too much for any increase in exports to overcome. And when the yen's value versus other currencies eventually rises to a realistic value, exports will drop off as well.

Since the population is shrinking, real estate prices decline steadily as well. So there could be a negative home equity effect on consumer spending.

Another major problem will be the large national debt built up which now will need to be covered by the output of a much smaller labor force. A default by Japan on its sovereign debt could occur.

Did I leave anything out?

Mish's "Spotlight on Japan" a must read

His recent post titled "Spotlight on Japan" is loaded with hard data, snippets from the media regarding Japan's economy, and his own insights regarding Japan's situation (most of which I agree with.

Mish begins by posing the question "is Japan a nation of savers?" He says no, and gives some facts to back up that assertion. These facts include: that Japan has the highest ratio of national debt to gdp of any country by far; that Japan's national debt is the equivalent of $7 trillion US dollars now; and that the Japanese government doesnt think it will be able to balance its budget until after 2010.

There is a quote included from a prominent economist to the effect that Japan is still the world's single biggest creditor nation. Granted, Japan still holds a lot of US treasury debt but has maintained its government budgets by issuing skyrocketing amounts of its own debt. So they have become a debtor nation. Hence the issue that Mish discusses where if the Ministry of Finance raises interest rates that will drive foreign holders of Japanese debt to sell, driving interest rates up further and potentially choking off gdp growth. Japan should have paid for its government spending by selling the US securities but of course that would have driven up the price of the yen thus hurting exports.

In my view, the Japanese government needs to spend less and save more; and the average Japanese citizen needs to spend more and save less. Domestic consumption needs to be a greater proportion of Japan's GDP than it is now. Of course, that will be hard to accomplish with a rapidly shrinking population.

Heretical analysis of US national debt

Over at The Skeptical Optimist, the US national debt is analyzed as if it were a perpetuity. The implication: that the principal will never have to be repaid and thus US taxpayers shouldn't worry about the size of the national debt or whether we're shortchanging our descendants. I wonder if policy makers at the Bank of Japan or the People's Bank of China have looked at their holdings of US Treasuries in this fashion? Somehow, I think that the Bank of Japan is going to want to unload those Treasuries at some point, or will at least stop buying new ones. For the issuer of a debt to be able to roll over that debt, the issuer needs to find a buyer willing to buy the new debt.