In an article yesterday, American Brad Setser (who based on my reading I consider to be one of the better ‘blog writers’ on things economic) comments on his rhetorical question ‘Who bought all the Treasuries the US issued in 2008? And who will be the big buyers in 2009?’  I think this question currently is of paramount importance – see my blog post earlier this week on Hilary Clinton’s comments made in China during her recent trip there.  Setser agrees with me on the importance of this question.  He begins his article by posing and answering the question:  ‘and just how important is China — clearly now the largest single holder of Treasury bonds — to the market?  Setser goes on to say:

•    central banks and sovereign funds, led by China, were huge buyers of Treasuries in 2008. “The work I have done with Arpana Pandey suggests that central banks bought close to $600 billion Treasuries in 2008 — with China accounting for a bit over half the total”;

•    if the marketable Treasuries that the Fed sold to finance its lender of last resort activities are counted as increase in the outstanding stock of marketable Treasuries, sales of U.S. Treasuries topped $1.6 trillion in 2008 implying (if the Pandey/Setser estimates for official purchases are right) that private investors bought more Treasuries in 2008 than did the world’s central banks;

•    with global reserve growth slowing central bank demand for Treasuries is likely to fall, implying (or so Setser thinks) that the ability of the US to finance large deficits at low rates depends far more than it has in the past on the willingness of private investors to buy Treasuries;

•    having said that, Setser then says that if China suddenly stopped buying Treasuries in the way it stopped buying Agencies last June, it would almost certainly have an impact on the market unless the Fed stepped in — “but that too would have consequences”.

•    In Setser’s view a world with $1.75 trillion US fiscal deficit and a $500 billion US current account deficit only works if Americans are willing to buy an awful lot of Treasuries. He believes the borrowing need of the US government is now far too big to be covered by the (much reduced) growth in the emerging world’s reserves;

•    Setser believes the slowdown in global reserve growth implies a slowdown in central bank financing of the U.S.;

•    in Setser’s view the overriding assumption behind the stimulus is that a rise in US household savings (linked to the fall in US household wealth) will create a pool of domestic savings that will flow, given the ongoing contraction in private investment, into the Treasury market. The rise in private savings and fall in private investment will allow the US government to borrow more even as the US economy as whole borrows less from the rest of the world; and,

•    Setser’s guess is that the Treasury market will be driven by developments in the US – not developments in China – in 2009.

My Comments:  I think readers of this post ought to read Setser’s article in its entirety.  It seems to me that if he is right in his analysis and conclusion that the U.S. is in an oxymoronic cycle that causes serious economic problems.  If I am right in my continued assertion that the U.S. consumer must spend to bring back growth in U.S. GDP – and I can’t see how I am wrong when in recent years the U.S. consumer has accounted for approximately 70% of that GDP – then how can the U.S. consumer both save and buy U.S. Treasuries, and spend on goods and services at the same time.  A better thesis might be that wealthy Americans, Investment Funds, and Hedge Funds et al might buy them, but who would want to put vast amounts of money into U.S. Treasuries with a fixed principal amount and a low yield in the economic climate.  I wouldn’t, but then again I am seriously beginning to wonder what I am missing.  I encourage your comments letting me know what it is.

Read Setser’s article by clicking here.

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