HONG KONG — 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. (NY Times)
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And from 24/7 WallSt...
The US government faces the very real prospect that an extremely deep recession will drive most buyers of debt out of the market completely. Some of those are sovereign banks and funds, and some are huge institutions looking for safe places to put cash. As the value of institutional holdings drop due to redemptions and a falling market, the entire pool of capital for Treasuries begins to dry up.
Is the amount of interest the Treasury can pay on its paper limited? In theory, yes. At some point the yield being offered begins to severely undermine the value of the principle that the auctions bring in.
The elephant in the room is whether the US would even default on a portion of its debt? The idea is nearly unimaginable. But, if the economy moves close to a depression, the government will have to make the awful decision of what is in its best interests. Default may drive investors out of Treasuries at astonishing rates. The failure to default may almost completely undercut the ability of the US to fund its own budget obligations.
What was once viewed as impossible has simply become improbable.
Very well put Douglas!
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