New York Times: China Losing Taste for US Debt

Rut Roh!! Can't have our largest crack (edit: credit) dealer back out on us now.

As we layer trillions upon trillions of debt (you are going to start to hear the word "cram down" hit the popular vernacular soon in the mortgage market) we are going to need to fund all this by (a) borrowing or (b) printing. The Armageddon scenario is people will eventually stop lending to us as we become such a risk in terms of inability to pay back (outside of printing money out of thin air). Then our arrival as a banana republic will be complete. [Nov 12: CNBC Europe: USA May Lose its AAA Rating] [Apr 15: Could the US Lost its AAA Rating?] A leading credit agency in Japan, as we noted, already is saying it's time to start writing down US debt (sort of like all those bad loans the banks have been writing down for 18 months) [Dec 26: Japan Should Just Begin Writing off US Debt]

There is only so much capital (savings) in the world and as countries with savings stimulate their own economies, they have less to give to the beggers... err, borrowers. More and more countries are taking the "Keynesian" route (huge article about this famous economist in Wall Street Journal today).

• The US alone is expected to issue $2 trillion (£1.3 trillion) of debt this year, and the Europeans are not far behind. Italy alone must tap the markets for €200bn as it rolls over its huge stock of public debt and meets the cost or recession. Fitch Ratings said Ireland, Greece, the Netherlands, and France face a heavy calendar of auctions as maturities fall due.

A bit of an alarming sign happened yesterday to Germany in the bond market.

• Mr Coulton said it would become increasingly hard for states to raise enough funds in the global bond markets to cover bank bail-outs and big budget deficits at the same time.
• The danger became all too real yesterday when even Germany failed to sell a full batch of government bonds at its annual `Sylvester Auction', which kicks off the debt season. Investors took up just two thirds of a €6bn (£5.6bn) sale of 10-year Bunds, leading to consternation in the markets
• "It's very poor," said Marc Ostwald from Monument Secuirites. "In 20 years covering Bund auctions I can't remember the Bundesbank ever being left with a third of the bonds."
• Traders will be watching very closely to see whether today's bond auctions in Spain and France go ahead as planned, or whether the world is starting to see a "buyers strike" as deluge of sovereign debt floods the market.

Again folks, this is why I watch in amusement as the market tells us everything is "priced in" - there are so many potential economic "Black Swans" out there, a thinking man would have much trouble sleeping at night. Thankfully, Wall Street is run by people whose timeline is 48 hours or less or there would be true fear (instead of glee) about all these new government programs.

If China begins to back off - we're in serious do do. Remember, China/Japan/UK are our 3 largest creditors. As for the UK? They've got some serious problems themselves as they've transformed themselves the last decade to be a "mini U.S."

• "In terms of debt dynamics, the UK is by far the worst of the `AAA' club of countries. The underlying fiscal picture is terrrible," said Brian Coulton, head of sovereign rates at the credit agency. Britain's bank rescue alone will cost 7pc of GDP.
• Britain is expected to issue £146bn this year, or 10pc of GDP.
• Fitch says the UK will have jumped from 44pc of GDP in 2007 to 68pc by late 2010, a staggering rise for major country. It usually takes a war to do such damage.

So I'm not so sure with a fiscal horror story themselves they are going to be finding funds to re-up to support the United States of Borrowing.

• There are fears that the next crisis in the global financial system could prove to be a rebellion by the bond vigilantes, already worried by talk of a bond bubble. This would push up rates used to fixed mortgages and corporate bond deals. Central banks can offset this for a while by purchasing bonds directly -- "printing money" -- but not indefinitely.

So that leaves China and Japan....

• China has bought more than $1 trillion of American debt, but as the global downturn has intensified, Beijing is starting to keep more of its money at home, a move that could have painful effects for American borrowers. The declining Chinese appetite for United States debt, apparent in a series of hints from Chinese policy makers over the last two weeks, with official statistics due for release in the next few days, comes at an inconvenient time.
• In the last five years, China has spent as much as one-seventh of its entire economic output buying foreign debt, mostly American. In September, it surpassed Japan as the largest overseas holder of Treasuries. But now Beijing is seeking to pay for its own $600 billion stimulus — just as tax revenue is falling sharply as the Chinese economy slows.
• “All the key drivers of China’s Treasury purchases are disappearing — there’s a waning appetite for dollars and a waning appetite for Treasuries, and that complicates the outlook for interest rates,” said Ben Simpfendorfer, an economist in the Hong Kong office of the Royal Bank of Scotland.
• China’s voracious demand for American bonds has helped keep interest rates low for borrowers ranging from the federal government to home buyers. Reduced Chinese enthusiasm for buying American bonds will reduce this dampening effect.
• For now, of course, there seems to be no shortage of buyers for Treasury bonds and other debt instruments as investors flee global economic uncertainty for the stability of United States government debt. This is why Treasury yields have plummeted to record lows.
• .... Another danger is that investors will demand higher returns for holding Treasury securities, which will put pressure on the United States government to increase the interest rates those securities pay.
• What is clear now is that the impact of the global downturn on China’s finances has been striking, and it is having an effect on what the Chinese government does with its money. The central government’s tax revenue soared 32 percent in 2007, as factories across China ran at full speed. But by November, government revenue had dropped 3 percent from a year earlier.
• A senior central bank official, Cai Qiusheng, mentioned just before Christmas that China’s $1.9 trillion foreign exchange reserves had actually begun to shrink.
• China’s leadership is likely to avoid any complete halt to purchases of Treasuries for fear of appearing to be torpedoing American chances for an economic recovery at a vulnerable time, said Paul Tang, the chief economist at the Bank of East Asia here. “This is a political decision,” he said. “This is not purely an investment decision." (thanks China! We appreciate it! America "richest country on the planet" - reliant on the kindness of strangers)

I'd be worried about this, but Obama will fix it all.