1 April 2006

Blasé Debtors Snub the Bank

PrudentBear.com - The One-Stop Shop for the Bear Case: "What does this embarrassing, xenophobic episode have to do with debtors snubbing the bank? Our perennial imbalances with oil exporters and others build up huge dollar holdings in foreign hands. Much of this is lent back to us so we can continue to 'function.' In January 2006 we ran an over $8B trade deficit with OPEC. In the last year for which Treasury International Capital data exists, we sold an additional $12B in US Government Debt to those allegedly suspect Middle East Folks. This was complemented by sales of $120B to UK, Channel Islands and Isle of Man buyers. Thus, we have no issue selling our future tax receipts. Borrowing suits us just fine, playing the role of debtor is apparently another matter altogether. We sit in false nationalist judgment of our creditors these days with blasé disregard for the possible ramifications and self congratulatory ignorance of our position.

No where is this more true or aggressively out of control than with China. The People's Republic and Hong Kong owned over $310B of US Government Securities at the end of January 2006. This fits nicely with the rise in China's Official Dollar Reserves to just under $820B, up over 30% across 2005. Cheap Chinese goods and massive lending have artificially supported US purchasing power- particularly for the earnings-poor bottom 80% of the US household income distribution. Waves of Chinese lending have supported low interest rates, cheap home mortgage rates and the deficit profligacy in Washington. What have we learned?

We just raised the Federal Debt ceiling for the fourth time in five years, $9 Trillion here we come. We passed a nearly $3 Trillion Federal Budget- for the record this equals 150% of China's 2005 GDP at present exchange rates.

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