An Update on the Biggest Monetary Megatrend of our Time!
China’s holdings of US treasury debt are dropping fast.
China got rid of 17 percent of its dollar holdings in 2022. Ten years ago it was America’s largest creditor with more the $1.3 trillion of US government bonds. Last year it still had a portfolio of more than $1 trillion of US debt.
Now it is unwinding its holdings fast! In December it reduced its US government debt holdings, for the fifth straight month in a row, to $867 billion.
Altogether, foreign holdings of US government securities fell by 6 percent. None of this comes at a good time for the Treasury Department, with skyrocketing government debt that needs to be funded somehow. Today the US government’s visible on-the-books debt is $31.456 trillion. That is up more than $100 billion since the first of the year, and up by more than $3.5 trillion dollars in the last two years.
At the same time that foreigners are dumping US dollar debt, the Federal Reserve is doing the same, unwinding its own portfolio of more than $8.4 trillion at the rate of $95 billion a month, or $1.140 trillion a year.
So, if the government must borrow more to keep the lights on and to fund the escapade in Ukraine, not to mention everything else it does, but the available universe of lenders is shrinking, how does the Treasury keep selling its IOUs?
Simple. It will have to offer higher and higher interest rates to attract sufficient buying.
And that is what is already happening. Here is a chart of 1-year US Treasury rates. From below 1 percent a year ago, the 1-year rate has now climbed to more than 5 percent.
But higher rates put a strain on the Treasury. Its cost of borrowing rises, which means the debt begins to grow even faster.
Eventually, it will look to the Federal Reserve, the lender of last resort, to help out. Because keeping the debt paid is an existential crisis for the government, the Fed will have to do as Washington wishes: PRINT MORE MONEY!
China has figured all this out already. That is why it is getting rid of dollars and keeps buying more and more gold.
Are you doing the same?