Foreign governments buy U.S. debt because of the dollar’s status as the world’s reserve currency – the American economy has long been viewed as a safe place to invest. That’s why the amount of U.S. debt held by foreign nations has increased more than six-fold since 2001.
But that’s all changing now – events that could spark a U.S. economic collapse are already underway…
The Wall Street Journal revealed this week that China – the largest holder of U.S. investments – is ridding itself of its U.S. government bonds at the fastest rate in history.
10 9 15 economic collapse 1In fact, a global sell-off of epic proportion is taking place.
Central banks in China, Russia, Brazil, and Taiwan are selling U.S. government bonds at such a pace that it’s caused the most dramatic shift in the $12.8 trillion Treasury market since the 2008-2009 financial crisis.
Foreign official net sales of U.S. Treasury debt maturing in at least one year hit $123 billion in the 12 months ended in July, according to Deutsche Bank Securities Chief International Economist Torsten Slok, reported WSJ. That’s the biggest decline since data started to be collected in 1978.
By contrast, foreign central banks purchased $27 billion of U.S. notes and bonds in the prior 12-month period.
Foreign central bankers’ massive offloading of U.S. debt sends this dangerous signal…
The Bear Collapse Argument
For the past several years, US markets have priced in all the optimism, while emerging markets priced in all the pessimism.
If US stocks overreacted to the upside, then emerging markets overreacted on the down.
The fact that emerging markets have been broadly hurt due to a strengthening dollar in the past could be an opportunity.
“Every wave, regardless of how high and forceful it crests, must eventually collapse within itself.” – Stefan Zweig
For the past several years, US markets have priced in all the optimism, while emerging markets priced in all the pessimism. The truth is somewhere in between. US stock market volatility has been increasing as of late precisely because investors, I believe, are beginning to realize that they had positioned in equities for a future which never came. On the other hand, despite all of the saber-rattling over just how weak emerging economies are, those markets have largely been volatile, going nowhere for the better part of 5+ years.
The US and world economies are drifting inexorably into the next recession owing to the deflationary collapse of commodities, capital spending and world trade. These are the inevitable “morning after” consequence of the 20-year global credit binge which has now reached its apogee.
The apparent global boom during that period was actually a central bank driven excursion into the false economics of household borrowing to inflate consumption in the DM economies; and frenzied, uneconomic investing to inflate GDP in China and the EM.
The common denominator was falsification of financial prices. By destroying honest price discovery in the financial markets, the world’s convoy of money-printing central banks led by the Fed elicited a huge excess of financialization relative to economic output.
The central manifestation of that was $185 trillion of debt growth during the past two decades——a stupendous explosion of credit which amounted to 3.7X the expansion of global GDP.