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Commentary :: Economy
Central Banks Reduce Their Holdings
Japan, the largest investor in US debts, has been reducing its holdings for three years.. The decline of foreign treasury holdings is not surprising because foreign dollar investors suffered massive losses through the dollar's devaluation in the last two months.
CENTRAL BANKS REDUCE THEIR HOLDINGS IN US GOVERNMENT BONDS
While the finance markets in August used US government bonds as a safe harbor, foreign central banks threw on the market treasuries worth $46.1 billion
By Rainer Sommer
[This article published in the German-English cyber journal Telepolis, 9/12/2007 is translated from the German on the World Wide Web, www.heise.de/tp/r4/artikel/26/26179/1.html.]
According to a statistic [1] of the US Federal Reserve, foreign central banks and governments sold US government bonds in August amounting to a net $46/1 billion. This is the greatest decrease since the Fed began publishing its data and the most intense decline at minus 3.8 percent since 1992.
The Fed is now holding $1.207 trillion in US bonds for foreign central banks. The most recent statistics confirm a trend that could be seen for a long time. According to the Bloomberg financial information agency, Japan, the largest investor in US debts, has been reducing its holdings for three years but still held $612 billion in June. China has also reduced its US treasuries 3.4 percent in the 2nd quarter to $405 billion. This was officially explained as the search for higher profits and regrouping in funds invested on a dollar basis in stocks, real estate and raw materials and not only as increasing mistrust toward the dollar.
The consequences for the US economy could be serious. Taiwan also trimmed its treasury-holdings last year ten per cent to $57.5 billion, five billion in August alone while South Korea also reduced its holdings 25 percent to $50 billion. The holdings in loans of so-called “State-Sponsored Enterprises” held in trust by the Fed were reduced five billion in August. These loans involve the enormous mortgage banks Fannie Mae and Freddie Mac from which the Fed now holds $773 billion for foreign central banks.
The decline in foreign treasury holdings is not surprising because as Bloomberg calculates [2], foreign dollar investors suffered massive losses through the dollar’s devaluation in the last two months. The dollar index of the New York Board of trade that measures the value of the dollar compared to the yen, euro, British pound, Canadian dollar, Swedish krone and the Swiss franc fell to its lowest level in 15 years. In the last eight months, the US currency lost eight percent compared to the Japanese yen. The prices of 10-year US government bonds fell five percent in the same time period through the crisis-conditioned “flight to quality” that may induce central banks to more extensive sales.
The decline in foreign bond purchases may have grave consequences in the medium-term for the US economy. According to a study published by the Fed [3], foreign treasury-purchases are mainly responsible for the low long-term interest level in the US. The interest-rate for 10-year US government bonds would be 0.5 percent higher without the official bond purchases. If the international private sector refuses US securities, the long-term interest will be 1.5 percent higher. This would raise the credit rates of American mortgage debtors $158 a month on average. In daily trade, the prices of debts of different quality are determined in their relations with each other. Because the markets set the likelihood of a payment failure for the government at practically zero, a liquid US government bond forms in the dollar realm. “Benchmark loans” are the basis for calculating all long-term credits. Business loans could increase in price raising the financing costs of the US economy nearly a quarter.
The reasons for the dollar collapse lie obviously in the enormous foreign trade imbalances. As Fed chief Bernanke explained in Berlin [4], the US balance of payments deficit last year amounting to $812 billion (6.2 percent of US gross domestic product) falls back to an annualized $779 billion. However its financing requires more than two billion dollars daily in foreign dollar investments. According to Bernanke, only a quarter of that is provided by foreign central banks. Three-quarters come from the private sector. Private investors could also increasingly refuse financing US deficits in view of the most recent problems with many US credit products. The consequences for the dollar’s foreign value can already be seen.
Links
(1) www.federalreserve.gov/releases/h41/Current/
(2) www.bloomberg.com/apps/news
(3) www.federalreserve.gov/pubs/ifdp/2005/840/ifdp840.pdf
(4) www.federalreserve.gov/newsevents/speech/bernanke20070911a.htm
Telepolis Artikel-URL: www.heise.de/tp/r4/artikel/26/26179/1.html
While the finance markets in August used US government bonds as a safe harbor, foreign central banks threw on the market treasuries worth $46.1 billion
By Rainer Sommer
[This article published in the German-English cyber journal Telepolis, 9/12/2007 is translated from the German on the World Wide Web, www.heise.de/tp/r4/artikel/26/26179/1.html.]
According to a statistic [1] of the US Federal Reserve, foreign central banks and governments sold US government bonds in August amounting to a net $46/1 billion. This is the greatest decrease since the Fed began publishing its data and the most intense decline at minus 3.8 percent since 1992.
The Fed is now holding $1.207 trillion in US bonds for foreign central banks. The most recent statistics confirm a trend that could be seen for a long time. According to the Bloomberg financial information agency, Japan, the largest investor in US debts, has been reducing its holdings for three years but still held $612 billion in June. China has also reduced its US treasuries 3.4 percent in the 2nd quarter to $405 billion. This was officially explained as the search for higher profits and regrouping in funds invested on a dollar basis in stocks, real estate and raw materials and not only as increasing mistrust toward the dollar.
The consequences for the US economy could be serious. Taiwan also trimmed its treasury-holdings last year ten per cent to $57.5 billion, five billion in August alone while South Korea also reduced its holdings 25 percent to $50 billion. The holdings in loans of so-called “State-Sponsored Enterprises” held in trust by the Fed were reduced five billion in August. These loans involve the enormous mortgage banks Fannie Mae and Freddie Mac from which the Fed now holds $773 billion for foreign central banks.
The decline in foreign treasury holdings is not surprising because as Bloomberg calculates [2], foreign dollar investors suffered massive losses through the dollar’s devaluation in the last two months. The dollar index of the New York Board of trade that measures the value of the dollar compared to the yen, euro, British pound, Canadian dollar, Swedish krone and the Swiss franc fell to its lowest level in 15 years. In the last eight months, the US currency lost eight percent compared to the Japanese yen. The prices of 10-year US government bonds fell five percent in the same time period through the crisis-conditioned “flight to quality” that may induce central banks to more extensive sales.
The decline in foreign bond purchases may have grave consequences in the medium-term for the US economy. According to a study published by the Fed [3], foreign treasury-purchases are mainly responsible for the low long-term interest level in the US. The interest-rate for 10-year US government bonds would be 0.5 percent higher without the official bond purchases. If the international private sector refuses US securities, the long-term interest will be 1.5 percent higher. This would raise the credit rates of American mortgage debtors $158 a month on average. In daily trade, the prices of debts of different quality are determined in their relations with each other. Because the markets set the likelihood of a payment failure for the government at practically zero, a liquid US government bond forms in the dollar realm. “Benchmark loans” are the basis for calculating all long-term credits. Business loans could increase in price raising the financing costs of the US economy nearly a quarter.
The reasons for the dollar collapse lie obviously in the enormous foreign trade imbalances. As Fed chief Bernanke explained in Berlin [4], the US balance of payments deficit last year amounting to $812 billion (6.2 percent of US gross domestic product) falls back to an annualized $779 billion. However its financing requires more than two billion dollars daily in foreign dollar investments. According to Bernanke, only a quarter of that is provided by foreign central banks. Three-quarters come from the private sector. Private investors could also increasingly refuse financing US deficits in view of the most recent problems with many US credit products. The consequences for the dollar’s foreign value can already be seen.
Links
(1) www.federalreserve.gov/releases/h41/Current/
(2) www.bloomberg.com/apps/news
(3) www.federalreserve.gov/pubs/ifdp/2005/840/ifdp840.pdf
(4) www.federalreserve.gov/newsevents/speech/bernanke20070911a.htm
Telepolis Artikel-URL: www.heise.de/tp/r4/artikel/26/26179/1.html
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