'America For Sale' excerpt: The hit from big debt

[Confederate Kahanist]

http://www.wnd.com/index.php?fa=PAGE.view&pageId=113555

By Jerome R. Corsi
© 2009 WorldNetDaily



 

This is the first of several excerpts exclusive to WND from WND senior staff reporter Jerome R. Corsi’s new book entitled "America for Sale: Fighting the New World Order, Surviving a Global Depression, and Preserving USA Sovereignty."

Selling a trillion dollars in debt is not like selling hundreds of billions of dollars in debt, just more.

Psychologically, a threshold is crossed when the U.S. Treasury goes into the world market to sell $1 trillion in debt. Foreign governments suddenly begin to ask if the United States is bankrupt, or not. This translates into a concern that the unthinkable might become thinkable, possibly even today.

If U.S. federal budget deficits continue to spiral out of control, is it possible the U.S. government might default not only on future Medicare, Medicaid and Social Security obligations, but also on trillions of dollars of debt sold by the U.S. Treasury? This possibility worries foreign governments that hold massive quantities of U.S. Treasury debt just as the Treasury is preparing under the Obama administration to go to market to sell trillions of dollars more in U.S. debt.

Yu Yongding, a former adviser to the Chinese central bank, the People's Bank of China, expressed concerns to journalists in September 2008 that China was growing increasingly cautious about purchasing more U.S. Treasury debt. In March 2009, Chinese Premier Wen Jiabao lent his voice to warn the United States that China's appetite to buy Treasury debt was not unlimited.

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"We have lent a huge amount of money to the U.S., so of course we are concerned about the safety of our assets," Wen Jiabao said at a press conference in Beijing. "Frankly speaking, I do have some worries."

The Chinese premier called on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets.

By the end of 2008, China had amassed nearly $2 trillion in foreign exchange reserves, the largest amount of foreign exchange reserves ever held by any nation, largely because of its strong exports to the United States and the resulting negative balance of trade which the United States has allowed to grow to unprecedented levels with China.

Approximately 80 percent of Chinese foreign exchange reserves have been held in U.S. assets, including Treasury bills and other U.S. debt obligations, including bonds issued by U.S. mortgage giants Freddie Mac and Fannie Mae. At the end of 2008, China held $696 billion of U.S. government securities, having surpassed Japan as the largest purchaser of U.S. Treasury debt.

In 2009 and 2010, the Obama administration will need to almost double the amount of Treasury bills held in Asia. The concern is that should concerns about the solvency of the United States take hold such that there was doubt the U.S. government could or would honor government debt obligations, holders of U.S. Treasury bills may begin dumping them on the open market.

"We are in the same boat, we must cooperate," Yu told Bloomberg. "If there's no selling in a panicked way, then China willingly can continue to provide our financial support by continuing to hold U.S. assets."

Clearly, China was giving warning signs, indicating a likelihood China would begin diversifying its foreign exchange reserve assets away from U.S. government debt.

U.S. bond holders face the risk that the value of their bonds on the current market could easily deteriorate, causing the foreign holders of U.S. debt to lose money on their U.S. debt portfolio. For example, the Telegraph in London pointed out that if China's holdings match the U.S. Treasury's average 48-month duration, then a 5 percent rise in yields, from 1.72 percent on the five-year note to 6.72 percent, would lose China 17.5 percent of its holdings' value, or $119 billion. Foreign buyers have typically absorbed only about $200 billion of Treasury debt annually, little help when the Treasury is planning to issue as much as $2.5 trillion of new debt in 2009 and $4 trillion in 2010.

In February, Yu Yongding demanded U.S. government guarantees on the total of $682 billion in various U.S. Treasury debt securities, including Treasury bills. On its face, Yu's request appears to ask for a redundant guarantee, since U.S. Treasury bills are by their design backed by the full weight and force of the U.S. government. The request for an additional specific government guarantee only underscored China's increasing uneasiness with continuing to buy burgeoning levels of U.S. federal debt.

China's concerns came as China was struggling to finance its own $600 billion bailout for Chinese financial institutions and corporations fighting for survival in the global economic downturn. In January, China's exports dropped 17.5 percent, while imports collapsed 43.1 percent. China's economy, heavily dependent on making cheap goods for the U.S. market, was cast into its own deep recession by the U.S. economic downturn.

 

Also in February, Luo Ping, a director-general at the China Banking Regulatory Commission, told reporters after a speech in New York that China would continue to buy U.S. Treasuries, in spite of its concerns about U.S. Finances. Speaking at the Global Association of Risk Management's 10th Annual Risk Management Convention, he asked, "Except for U.S. Treasuries, what can you hold?" He answered his own question suggesting gold may be the only alternative. "Gold?" he asked rhetorically. "You don't hold Japanese government bonds or U.K. bonds. U.S. Treasuries are the safe haven. For everyone, including China, it is the only option."

Still, Luo was not enthusiastic. "We hate you guys," he added. "Once you start issuing $1 trillion - $2 trillion … we know the dollar is going to depreciate, so we hate you guys. But there is nothing much we can do."

If the dollar depreciates in value as a consequence of massive borrowing in 2009 and 2010, all holders of U.S. Treasury securities, including China, will take a loss in the value of their asset holdings. Dollar devaluation, whether officially declared or not, affects not only the buying power of U.S. citizens but of all foreign nations that hold U.S. debt securities issued by the Treasury.

China has been steadily reducing the percentage of its foreign exchange currency assets held in dollars, since a 2003 high when that total was 83 percent. Should China decide to reduce the percentage of its foreign exchange currency held in dollar assets to some 65 percent or lower, the U.S. Treasury would have a much more difficult time subsidizing massive U.S. budget deficits.

Unwittingly, the U.S. has empowered China to inflict massive damage without firing a shot. All China would have to do is sell U.S. Treasury bonds on foreign exchanges at a deep discount. While China may lose trillions of dollars in the process, China might calculate the cost would be a cheap price to pay, especially if the result were to inflict permanent economic damage on an arch-rival that once was the world's sole superpower