China to ‘liquidate’ US Treasuries, not dollars

September 20, 2011 by · Leave a Comment
Filed under: Currency News 

We have two choices, we either need to make the hard choices ourselves or they will be made for us, that is for sure.   Do we want to do it on our terms or not?  This article is troubling is that this could signal a significant decrease in debt buying from our largest purchaser of U.S. Treasuries and obvious are largest trade partner unless you count Europe as a whole.

If this actually come to fruition then we will see disorderly auctions for our debt and in that event, the Federal Reserve will be forced to come in as the buyer of last resort to prop up our debt markets.  Personally, I think this would be healthy for the long-term.  We need some sort of wake-up call to let our government know that they can not continue to keep running deficits and we need to bite the bullet and cut entitlement programs and scale back the size of government.   I do not affiliate myself any particular political party, so please don’t read this and try and box me into some group.

What I am speaking about is just basic math.  For every dollar of debt we have to create beyond what we take in as taxes, either goes into some asset class and that raises prices or into inflation once the economy picks up speed.  We need to live within our means and encourage savings and investment on a major scale.  I have been working on a list of items that would greatly help fix America and get us back into a leadership role on the economic scene.   A major portion of this list addresses entitlements, basically it sets cut-off for the younger generation so we can keep our obligations to our citizens who don’t have enough time to create an alternative plan.   Remember, when you try to help everyone, then you help no one because we will be broke trying.

The Telegraph (Ambrose Evans-Pritchard) –  The debt markets have been warned.

A key rate setter-for China’s central bank let slip – or was it a slip? – that Beijing aims to run down its portfolio of US debt as soon as safely possible.

“The incremental parts of our of our foreign reserve holdings should be invested in physical assets,” said Li Daokui at the World Economic Forum in the very rainy city of Dalian – former Port Arthur from Russian colonial days.

“We would like to buy stakes in Boeing, Intel, and Apple, and maybe we should invest in these types of companies in a proactive way.”

“Once the US Treasury market stabilizes we can liquidate more of our holdings of Treasuries,” he said.

To my knowledge, this is the first time that a top adviser to China’s central bank has uttered the word “liquidate”. Until now the policy has been to diversify slowly by investing the fresh $200bn accumulated each quarter into other currencies and assets – chiefly AAA euro debt from Germany, France and the hard core.

We don’t know how much US debt is held by SAFE (State Administration of Foreign Exchange), the bank’s FX arm. The figure is thought to be over $2.2 trillion.

The Chinese are clearly vexed with Washington, viewing the Fed’s QE as a stealth default on US debt. Mr Li came close to calling America a basket case, saying the picture is far worse than when Ronald Reagan and Margaret Thatcher took over in the early 1980s.’


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