It's The Economy Stupid

[trevo]

Or formerly known as the Dollar Money Situation thread onthe last board..Here goes...

China sells $34.2bn of US treasury bonds
Analysts fear Beijing's move may suggest a loss of faith in American government's economic policy

Tania Branigan in Beijing and Heather Stewart guardian.co.uk, Wednesday 17 February 2010 17.11 GMT Article history

China sold $34bn (£21.5bn) worth of US government bonds in December, raising fears that ­Beijing is using its financial ­muscle to signal that it has lost confidence in American economic policy.

US treasury figures for the period ending in December 2009 show that, following the sale, China is no longer the largest overseas holder of US treasury bonds. Beijing ended the year sitting on $755.4bn worth of US government debt, compared to Japan's $768.8bn.

Since the sub-prime crisis that began on Main Street USA grew to engulf the global economy, China's leaders have repeatedly expressed concerns about US policy. December's $34bn sell-off made only a tiny dent in Beijing's total holdings of US assets, which amount to well over $1tn when stakes in American companies, as well as treasury bills, are taken into account.

But the news intensified concerns about China's appetite for bankrolling ever-widening American deficits. Premier Wen Jiabao told reporters last year: "We have made a huge amount of loans to the United States. Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried."

When Timothy Geithner, the US treasury secretary, visited China last summer, he sought to reassure his hosts, using a speech to promise that "the United States is committed to a strong and stable international financial system. The Obama administration fully recognises that the United States has a special responsibility to play in this regard, and we fully appreciate that exercising this special responsibility begins at home."

But Allan Meltzer, an economics professor at Carnegie Mellon University, said China's bond sales should be a wake-up call for Washington. "The Chinese are worried that we have unsustainable debt levels, and we do not have a policy for dealing with it," he said.

China's sales contributed to a record drop in foreign holdings of short-term treasury bills in December: in all, net overseas holdings of short-term bills fell by $53bn. The previous record was $44.5bn in April last year.

However, there was little sign that world investors as a whole have lost their confidence in the dollar as the safe-haven currency of choice: overall, the US saw a net inflow of $60.9bn, as investors more than offset sales of short-term debt by buying longer-term securities and shares.

Japan, Britain, Luxembourg and Hong Kong made sizeable purchases, with the UK buying $24.9bn of US government debt.

Some analysts warned that it would be a mistake to read too much into one month's data, particularly since the current crisis in the eurozone makes investors' main alternative to the dollar look particularly unattractive.

David Wyss, chief economist at Standard & Poor's in New York, said: "China may not be too happy with us right now, but you have to ask: what else are they going to do with their money?"

Ho-fung Hung, author of China and the Transformation of Global Capitalism, said it was hard to tell whether China had a long-term strategy for selling US debt. "I think decision-makers know very well that any large-scale selling of US treasuries won't do any good to the ­Chinese economy, which still needs a sustained recovery of the US economy to pull up its export sector. Such selling will also devalue China's existing holdings of treasuries," he said.

"Dumping treasuries will also entail the problem of what to buy in return – definitely not euro or yen assets at the moment."

However, America must sell an unprecedented volume of treasuries in the coming years to finance its record deficit, and pay the cost of bailing out Wall Street and kick-starting the economy with a $900bn stimulus package. Any evidence that foreign investors are beginning to doubt Obama's promises to bring the public finances under control will spread alarm in Washington
http://www.guardian.co.uk/business/2010 ... sury-bonds

[Tuatha]

Given the nature of government in China, I wonder what would happen if the U.S. defaulted on its loans with China?

[whirlwind]

Given the nature of government in China, I wonder what would happen if the U.S. defaulted on its loans with China?

nothing yet....... you can not build an army with IOU's...but China has awakened to reality and just how bad they have been treated by the Powers That Were.

[trevo]

At last. Honest bankers! They do what they say on the name...

[trevo]

And following on from the observation above.....

Economists: Another Financial Crisis on the Way
Nonpartisan Group Led by Nobel Winner Calls for Stronger Financial Reforms

by Matthew Jaffe

Even as many Americans still struggle to recover from the country's worst economic downturn since the Great Depression, another crisis -- one that will be even worse than the current one -- is looming, according to a new report from a group of leading economists, financiers, and former federal regulators.

In the report, the panel, that includes Rob Johnson of the United Nations Commission of Experts on Finance and bailout watchdog Elizabeth Warren, warns that financial regulatory reform measures proposed by the Obama administration and Congress must be beefed up to prevent banks from continuing to engage in high risk investing that precipitated the near collapse of the U.S. economy in 2008.

The report warns that the country is now immersed in a "doomsday cycle" wherein banks use borrowed money to take massive risks in an attempt to pay big dividends to shareholders and big bonuses to management -- and when the risks go wrong, the banks receive taxpayer bailouts from the government.

"Risk-taking at banks," the report cautions, "will soon be larger than ever."

Without more stringent reforms, "another crisis -- a bigger crisis that weakens both our financial sector and our larger economy -- is more than predictable, it is inevitable," Johnson says in the report, commissioned by the nonpartisan Roosevelt Institute.

The institute's chief economist, Nobel Prize-winner Joseph Stiglitz, calls the report "an important point of departure for a debate on where we are on the road to regulatory reform."

The report blasts some of Washington's key players. Johnson writes, "Our government leaders have shown little capacity to fix the flaws in our market system." Two other panelists, Simon Johnson, a professor at MIT, and Peter Boone of the Centre for Economic Performance, voiced similar criticisms.

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner "oversaw policy as the bubble was inflating," write Johnson and Boone, and "these same men are now designing our 'rescue.'"

The study says that "In 2008-09, we came remarkably close to another Great Depression. Next time we may not be so 'lucky.' The threat of the doomsday cycle remains strong and growing," they say. "What will happen when the next shock hits? We may be nearing the stage where the answer will be -- just as it was in the Great Depression -- a calamitous global collapse."

The panelists call for major banks to maintain liquid capital of at least 15 to 25 percent of their assets, the enactment of stiffer consequences for executives of bailout recipients and for government officials to start breaking up firms that grow too big.


In the report, Elizabeth Warren, who was chair of the Congressional Oversight Panel, reiterates her calls for an independent agency to protect consumers from abusive Wall Street practices.

"While manufacturers have developed iPods and flat-screen televisions, the financial industry has perfected the art of offering mortgages, credit cards and check overdrafts laden with hidden terms that obscure price and risk," Warren writes. "Good products are mixed with dangerous products, and consumers are left on their own to try to sort out which is which. The consequences can be disastrous."

Frank Partnoy, a panelist from the University of San Diego, claims that "the balance sheets of most Wall Street banks are fiction." Another panelist, Raj Date of the Cambridge Winter Center for Financial Institutions Policy, argues that government-backed mortgage giants Fannie Mae and Freddie Mac have become "needlessly complex and irretrievably flawed" and should be eliminated. The report also calls for greater competition among credit rating agencies and increased regulation of the derivatives market, including requiring that credit-default swaps be traded on regulated exchanges.

With the Senate Banking Committee, led by Chris Dodd, D-Conn., poised to unveil its financial regulatory reform proposal sometime in the next week, the report calls on Congress to enact reforms strong enough to prevent another meltdown.

"Sen. Dick Durbin once said the banks 'owned' the Senate," says Johnson. "The next few weeks will determine whether or not that statement is true."
http://www.commondreams.org/headline/2010/03/03-0